The End of 100% Financing?

It is pretty clear that in some markets, housing prices are falling.  The numbers are small, at least so far, on the order of 1% or 2%, but the potential for steeper declines certainly has to be taken into consideration.

Let's look at the risk should the market head south.  If you're the buyer, even if the market tanks, you have to live somewhere, right.  We did have some experience with this in Southern California in the early 1990's.  At that time, the most you could borrow was 90% of the value of a home, but some homes went down more than 10%.  Those who were hurt were those who had to sell. And some of them did "short sales," where the lender took as payment in full whatever the proceeds of the sale were.

In fact, most people just stayed put, realized that that their homes were – at that moment – worth less than the sum of the mortgages.  They figured they would still be there when the market recovered. It finally came back and property values are now probably 300% higher than at the bottom.

Which brings us to the lenders in the all to common 100% financing programs.  Most of these are done with an 80% LTV 1st and a 20% LTV 2nd for the balance.  The lender on the 2nd is, effectively, assuming all the risk if values should drop.  In the event of a foreclosure, not only would they be "out" the difference between the sales price and their loan balance, they would also have to bring and keep the 1st current during foreclosure. Finally, they would also have to pay the real estate commission on the sale when they finally got it back.

I can't imagine that they could even get 50 cents back for each dollar of their loan.  So how long will they be willing to provide this financing?  What then happens to the market when that kind of popular financing is no longer available?

Comments

[Payday Loan Advocate]

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