Are condos being blacklisted?

Are these the same banks that took federal funds to lend to consumers?

News flash: 20% down is the new normal. Get used to it. The days of reckless lending are over.

How does this affect FHA loans?

Does anyone know which types of "condos" these rules apply to? Is a unit in a triple-decker considered a "condo", or only a unit in a larger building?

While real estate may be local (and that's a very big may), the financial market is global. Remember banks are not in the business to lend, they are in the business to get paid back. With real estate prices dropping across the country, unemployment rising, etc. it really doesn't matter whether you are looking to buy in Boston, Las Vegas or Butte, lenders want to make sure they get paid. The reason banks cared less about downpayments during the bubble is because home prices were skyrocketing. So even if the borrower defaulted, it was very likely that they could recoup the full value of the property. That is no longer the case. Requiring a large down payment is one way to help insure they get paid back.

Bobby - if a bank takes taxpayer's money (as many did) to make them available to consumer for them to buy houses/condo to jump star the housing market to help the larger economy to benefit us all then this argument that banks are in business of getting paid wrings kinda hollow. Sure, that's a general rule, but... I bought a condo in February in a 100% owner occupied development and had to hear a lot about how condos are highr risk investment. I did end up giving 20%. But that was not what got to me. I was going to do that in any event. It was all those points and higher interest rates I was being quoted just because it was a condo. Again, you want to play these games do not take taxpayer's money, otherwise get with the program and stop subverting federal policies.

Bobby says "The reason banks cared less about downpayments during the bubble is because home prices were skyrocketing". This is true, but they should have had the foresight to see that markets that skyrocket usually crash. The rules that they're instituting today would have been much more appropriate in 2004 than they are now. And while it's true that "banks are not in the business to lend", GSE's like Fannie and Freddie are, to some extent, in the business to promote lending when private banks have become too cautious (and likewise, they should have been refusing to back mortgages back in 2004 when private banks had become too aggressive).

"Its always a good time to buy." - National Association of Realtors

19.1% drop. Do not attempt to catch a falling knife.

The 20% down payment issue is far outdated in today's world of hyper-leverage. And I would argue it is counter-productive to the prevention of foreclosures and the prevention of the losses bank' are taking on their loan portfolios.

Consider two scenarios for a home at $400k, 5% interest rate (although the interest rate matters little for this purpose). Home-owner 1 puts 20% down, taking out a $320k loan and pays $1,700 a month (plus insurance, taxes, etc, but those are constant regardless of the financing, so let's keep int simple.) The Bank is happy because there's 20% down, right?

Let's take option two, a fully financed $400k purchase is roughly $2150 a month. More expensive on a monthly cash flow basis, but home-owner #2 now has $80k in the bank, which buys him 3 year's worth of mortgage payments before he has to contribute a single additional dime.

In today's world of wage reductions, layoffs, uncertainty, etc., wouldn't the rational approach for both parties (lender and home owner) to horde a reserve of 3 years mortgage payments? Because if Home Owner 1 loses his job, the bank isn't going to stop demanding payment because he has 20% down. They still want to get paid $1700 every month. Not committing the 20% down allows both parties a 3 year cushion during which time conditions will change, drastically providing greater stability for all parties.

"News flash: 20% down is the new normal. "
News flash: banks are not being any more careful than before, unless things have changed since January when we bought a house with 3% down, despite my husband already owning a condo (which we can't sell now). In theory we can support this... if we never need cars, eat only ramen, and have no social lives. We'll be able to handle it until we get rid of the condo (and most likely take a big loss, and just move on) but we couldn't believe banks were still going along with this given the current situation - what 's to stop us from walking away from the condo at this pont?

Jaehos (#9): In general, the reason why the financing setup you suggest isn't used more often is because it would be more expensive for the borrower and riskier for the bank. The reason it is more expensive for the borrower is that they have to pay interest on 100% of the purchase price rather that 80% (assuming a typical 20% down payment). The reason why it is riskier for the bank is a bit more complicated . With traditional 80/20 financing the bank can foreclose immediately when the borrower stops paying. Therefore, the entire value of the equity provides a cushion against loss. If banks instead allowed borrowers to make down payments into a reserve account as you suggest, then they would have no recourse to initiate foreclosure until their entire loss cushion was gone. This would substantially increase the risks for lenders. And by the way, this idea is not new. There are some jumbo loan products out there now which require 6-month's worth of payments to be made into a reserve account. This is on top of the usual 20% down payment requirement.

carly (#10): Your experience is clearly an exception to the rule. My guess is that you were either financed through one of the Fannie/Freddie backed loan programs and/or you received seller financing from the developer/promoter of your condo project. Please provide more details such as: how much did you pay (approx), which bank did you use, did you use one loan or two, your interest rate(s), is the condo development new construction or a resale, how many units are in the building.

Alex, banks didn't take taxpayer money to lend back to us, they took tax payer money to shore up their balance sheets since many of them were and still are insolvent. And just think about what you said - They took OUR money in the hopes that they could turn around and lend it back to US with INTEREST! Does that make any sense at all. I hope not. If it does, I would love for you to give me $100K so that I can loan it back to you at 6% interest.

Dave, I still argue that many of the financial players probably knew exactly what was going on. They continued to drink from the punch bowl because they knew they could get away with it and they knew that their politician buddies were going to bail them out when things started to turn south.

Jaehos, based upon your argument you still need 20% saved. Instead of putting it towards the purchase, you have it in a rainy day fund. You still need to have the financial discipline and means to save tens of thousands of dollars. I guess if you can some how force people to use that money only to cover their mortgage payment and for no other reason, then your idea works. How you regulate that is beyond me. And how many people want $50K sitting in a savings account that they can't touch for any other reason then to pay their mortgage?

The 20% down payment serves a few functions. It shows that you are financially responsible (at least to the extent that you can save 20% of the purchase price) and that you have a stake in the property so you are less likely to walk away. The fact remains that if low and no down payment loans had not existed we would not have had a bubble or at least not one to the extent we did.

Bobby:

I don't disagree with you that many in the financial industry knew how high the risk was (and also knew that the government would eventually absorb a lot of this risk when things began to tumble).

I also believe, that the purpose of the GSEs should be to help stabilize the residential housing market. They have done, and continue to do a terrible job at this. During the bubble, they did nothing to try to tame the out of control prices by refusing to back mortgages on over-valued properties. Now, they are letting the free-fall run out of control by demanding unreasonable restrictions. I have no problem with enforcing the 20% downpayment convention, but as the article on this blog says, you pretty much need a 25% downpayment to purchase a condo nowaday (without paying a penalty on your rate anyway).

No Bobby. They were given money to lend. That was the whole justification. 'Cause we needed consumers to spend, but credit was scarce. Do I give a damn about their balance sheets? I think not. So again. They took taxpayer's money go ahead and freaking lend into the economy. You know, let the credit, the blood of the economy, flow again. Does it make sense that we need to pay interest on that money? Maybe not. But does it make sense to give government money to banks at all? I don't agree with you at all here.

Alex,
I think Bobby is making reference to the banks' intentions. The banks were given money to lend, but they used it to; pass simple capitalization tests, save for a rainy day and/or to use immediately for operating expenses in continuing to execute a failed business model. Hank Paulson never forced banks in writing to use the money to lend, so they didn't.

Alex, the banks are lending because of the money they were given. Without the government bailout, they would have been out of business, so any lending they do now is more than would have existed otherwise. Don't expect them to lend using the same standards as during the bubble as it was precisely those standards which created the problems to begin with.

David - the 20% down payment is fine with me whether it is a house or a condo or whatever. I paid 20% back in Feb. of this year. However, to tell me that my interest rate is higher and I have to pay points to get it, just because I am buying a condo, that sounds like an opportunity to make extra bucks for banks, not "standards." Got the money from the government? Make it available instead of making it more difficult for people. I am still not convinced.

Yes, Alex, the stated intention was for the banks to take the money and lend, but the fact is most did not and I doubt had any intention of doing. If the government and bankers said they needed the bailout to shore up their balance sheets, what would have been the reaction from the American sheeple? But when they say they need the bailout to get the economy going again, all is well.

Exhibit B from the Wall Street Journal:

"Banks Aiming to Play Both Sides of Coin
Industry Lobbies FDIC to Let Some Buy Toxic Assets With Taxpayer Aid From Own Loan Books

Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves.

Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program."

This comes as no surprise. What is surprising is that the banks want to perpetuate this fraud for all to see. I at least thought they would create an entity within their company to purchase the assets and hide the fraud.

Alex - I think there is a legitimate case to be made that a condo is a more risky investment then a SFH because while home values can be eroded quickly in a falling market, they can be wiped out even quicker for a Condo. There is the risk that values continue to decline, and while I'm not going to call a guarantied 30% off current prices like Lance, I think that an additional 20% fall that wipes out the down payment is something that a responsible bank should account for. And one way a bank hedges for additional risk is by charging more for the loan.

Now, why we should expect the banks to be responsible now when there was no responsibility to be seen for quite a while is a question I can't answer. I also see no reason to believe that if that 20% fall happens they won't hit the government up for a bailout again. Bankers take the profit and we take the risk right?

"one way a bank hedges for additional risk is by charging more for the loan."

Another way to hedge is to use someone else's money. In this case it is taxpayer's money. That's the whole point. You get the money from the taxpayer you lend it into the economy. Don't give it to deadbeats with no credit, no income and no downpayment. But the excuses such as condos are more risky than houses do not fly here. Don't take the people's money if you don't like it. Am I alone on this one? I had 20% down, 767 credit score and stable government paycheck. It is insulting to be told to pay more because I was buying a condo as opposed to a house. It reminds me of car insurance. No matter what kind of car you buy it seems to be on the list of most stolen cars. Anybody else is tired of bending over?

W:

You asked why we can expect banks will be “more responsible” now than in the recent past. The short answer is that incentives in the business have been fundamentally realigned. The longer, more complicated answer is as follows...

During the boom years, banks were not in the business of lending--at least not in the traditional sense. Banks were in the business of loan origination. They collected fees to make loans which they quickly packaged and sold (usually within 6-12 months) to investment banks to be pooled, securitized, and sold to investors as CMOs, CDOs, etc. The point is, banks were not left holding the bag when bad loans defaulted. In other words, what existed was an incentive structure where banks were rewarded for making as many crappy loans as possible.

So what changed? In fall 2008, the house of cards collapsed and the market for securitized debt dried up. With the exception of the GSEs, nobody is buying mortgage derivative products anymore. And without an end buyer (the traditional “bag holder”), the whole financial assembly line stops. Banks can no longer easily sell mortgages they originate. In other words, there is a very real possibility they will be sitting on loans they make for years or decades. Naturally, this has led to a renewed interest in making loans that will be paid back. In essence, banks now have to “eat their own cooking”. This is why they have returned to traditional conservative lending standards.

We are closing tomorrow on a condo, and boy did we work for it.

In February, we were preapproved for a MassHousing loan with 3% down through a well-known major bank. We made an offer on a condo on the first floor of a three-family home. Our offer was not accepted, so we kept looking.

At the end of March, we found another condo that we really liked. We went back to the same bank to make sure that our preapproval was still good. We were flabbergasted when they said no. Our credit is good, we have the down payment, the monthly payments would be less than the condo we'd made the offer on in February which they'd approved us for - what is the problem?

We were told that whereas there were few restrictions on three-family properties like the one we'd tried to buy in February, properties in buildings with four units must be 100% owner-occupied to qualify, and one of the four units in this building is rented. In the words of our own loan specialist, the decision had nothing to do with us or our readiness to become homeowners, but was based on the whims of bean counters working in a tall building and making decisions based on a 50,000-foot view of the market they'd derived from spreadsheets.

We consulted another lender who checked to make sure that this wasn't a MassHousing requirement tying the bank's hands. Sure enough, it was the bank's rule; MassHousing was ready and willing to work with us - provided we could find a lender who was also willing.

We found a smaller mortgage company with a good reputation based on the recommendation of a friend. Through them, we secured a loan through MassHousing, and as I said, we close tomorrow.

The funny postscript is that when we first expressed interest in the property, the listing agent asked us which lender we were working with. When we told her, the first words out of her mouth were "I know some good mortgage people you might want to talk to." We didn't think much of it at the time, but it appears that the big bank in question is gaining a reputation for being hard to deal with. The moral here is to shop around. If you've done the work to get yourself in a position to buy, someone will work with you, and your desired property.

Wells Fargo mortgage charges 3/4 points additional for Condo mortgage applications. Is this standard practice ?