Monday, July 2, 2007

Housing’s New Math: The Seller Pays the Buyer

Previous: Fed Takeover of Subprimes Renews Risk in Mortgage Lending

The LA Times actually tried to portray the federal government’s new taxpayer-backed risky lending as a return to old-fashioned prudence.

You decide:

The old days required a homebuyer to bring a 20% downpayment on a 30-year mortgage, which insured that he/she had his/her own "skin" in the game and an incentive to repay the remaining 80% so as not to forfeit his/her investment.

"Modernizing" and "Bringing the FHA into the 21st Century" with the Fed's New "Home Possible" Lending Practices

Congress is planning to slash the Federal Housing Administration (FHA) lending standard to 0% down and a 40-year mortgage. It is exactly the no downpayment condition, and therefore no home equity, and therefore no risk of the borrower's own money, that makes defaults more likely.

Further, the federally-chartered Freddie Mac offers the "Home Possible 100" with 0% down for up to $417,000 and 3% seller "contributions"--allowing a "buyer" (using the term loosely) to walk into a house worth almost double the national median price with none of his/her own money but with a suitcase full of the seller's money.

Yes, you must pay the buyer to live in your home.

Does that sound like old math or new math?

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