Thursday, September 9, 2010

Subprime 2.0?

Edward Pinto, the Chief Credit Officer of Fannie Mae back in the 1980's, has written an Op-Ed for Bloomberg titled "Subprime 2.0 Is Coming Soon to a Suburb Near You" that talks about no-money down and lowered credit score requirements for government-backed loans.  [Fair warning: this op-ed is takes an EXTREMELY negative view of the loosened underwriting standards that became prevelant in the mid-2000's.]

One of the more interesting quotes in the article is where he cites the number of no-money down mortgages (or extremely low-money down) as a percentage of all loans:

In 1990, one in 200 home-purchase loans (all government insured) had a down payment of less than or equal to 3 percent. By 2003, one in seven home buyers had such a low down payment, and by 2006 about one in three put no money down.

Visually... this is what I've come up with:

Click to Enlarge

Now... Pinto believes we will to return to an environment of subprime lending that he refers to as “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.

Pinto is calling for a return to hefty down payments - - a minimum of 20 percent down, with few exceptions, and believes documentation should be “iron-clad."

NOW, couple of questions for our readers (feel free to voice your opinion in the comments): 
  • What would this mean for those of us working on affordable housing issues? 
  • Would this cause more problems than it solves?
  • Are there other solutions to affordable housing... that don't involve simply lowering lending standards? 

One of the conferences that takes up the issue of affordable housing... and discusses related policy issues is the "Homes For All" Conference.  You can learn more about the conference here


  1. To me, the biggest question is how well did the government-backed loans such as FHA or MHFA, or the portfolio loans such as US Bank's American Dream perform? The statistics shown above seem to lump all low FICO/low downpayment loans in to one category.

    This is fundamentally inaccurate (or, I should say, very likely so). Many government-backed and portfolio loans that are more liberal in terms of credit scores and downpayment take into account other compensating factors. Other no-doc or "liar loans" are in a completely different category.

    It's possible that the loans in question performed just as poorly as the ones that more famously contributed to our mortgage crisis, but I doubt it.

  2. The numbers in the Twin Cities suggest that low-down financing is even higher right now:

    39% of the sales in the 1st half of 2010 in the Twin Cities were FHA financed.

    Higher down payment requirements will dramatically reduce the number of buyers in the market but that might actually improve affordability since it would reduce demand. Home owners need to have financial ability to not only purchase but also maintain a home so some kind of down payment isn't a bad thing. How much is always the debate - too little and they have no cushion for down market corrections and too much and you've prevented good buyers from buying homes.

    There are no easy answers to all this but I think that we need to keep in mind that this is the worst economic climate in 60+ years and this is the first severe housing correction we've had since then too. While clearly there were excesses that need to be reigned in we also won't be in this market forever and shouldn't get too tight on standards.

  3. Hawthorne Hawkman -

    Take a gander here:

    This isn't as bad as some of the subprime but it's pretty close!


This is a moderated blog. That means all comments will be reviewed before posting. In addition, we expect that participants will treat each other, as well as the Center, our Counseling Network and other partners, with respect. We will not post comments that contain vulgar or abusive language; personal attacks of any kind; any offensive terms; spam; are clearly “off topic” or that promote services or products. Comments that make unsupported accusations will also not be posted.