In 2006, around the peak of the latest housing boom, roughly one in three homebuyers relied on no money down mortgages to obtain financing, according to remarks from former Fannie Mae chief credit officer Edward Pinto.
That compares to about one in seven homebuyers in 2003, and one in 200 back in 1990.
Aside from low down payments, lax underwriting and low credit score requirements also contributed to the downfall, “serving the political interest of affordable housing for all.”
He believes we will to return to an environment of subprime lending, dubbed “Subprime 2.0,” as the FHA continues to accept borrowers with low Fico scores and minimal down payments.
“For example, the FHA’s average down payment is just 4 percent,” he wrote. “Even this meager amount disappears after adjusting for seller concessions and financed insurance premiums.”
And the average FICO credit score on FHA loans is expected to fall to 635 by 2013, which I certainly consider bad credit, although not “subprime” by mortgage lender standards, which is traditionally below 620.
Pinto wants to revert back to an era of hefty down payments, calling for at least 20 percent down, with few exceptions.
And believes documentation should be “iron-clad,” while lender capital levels should be raised.
“Here’s my proposal to bring Congress’s penchant for imprudent lending to a quick end: All congressional pension assets should be invested in funds backed solely by the high- risk loans mandated by federal housing legislation. I have a feeling that things would change fast.”