The Three Percent Solution

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Th e M Rep o RT | 17 cover story But there is no evidence 3 percent down payments will help even if tighter underwriting guidelines keep lenders in line this time. In fact, evidence from the subprime crisis suggests lower down payments played at least some role in millions of mortgages becoming toxic prior to the 2008 housing meltdown. In a report titled "The Subprime Mortgage Crisis: Underwriting Standards, Loan Modifications, and Securitization," researcher Laurence Wilse-Samson, with Columbia University, cites data showing that between 2003 and 2007, median FICO scores remained constant. The outliers that caused risk in the subprime segment included other faltering underwriting standards—namely low down payments resulting in higher loan-to-value ratios and no, or low, documentation borrowers. The new 3 percent down pay- ment option, however, will be buffered this time by safer lending criteria enacted in the wake of the financial crisis, according to George Mason's Sanders. In other words, loans will be fully documented and underwritten to ensure a basic ability to repay the debt. Still, borrowers living in a shaky economy with too much debt are unlikely to really benefit. David Pemberton, a mortgage originator with Stratis Financial's office in Huntington Beach, California, agrees that safety is not an issue with the GSE product. "It can't hurt. It's nice to have options. I think it will be more limited than the FHA program in terms of credit qualifications and debt-to-income ratios," he said. "For someone who does qualify, it will allow them to purchase a home with a lower down payment, which could increase first-time homebuyers in the market." "The only borrowers who will be able to take advantage of this are those that were not previ- ously going FHA and borrow- ers who are a good credit risk," explained Albert Farah, also an originator with Stratis Financial's Huntington Beach team. The potential consumer is a "lower debt-to-income ratio type of indi- vidual," he said. "FHA was the only game in town for a while," Farah said, "and now the GSEs are starting to com- pete with the FHA in the same arena for a better quality borrower." The overall takeaway from analysts and real estate profession- als is the 3 percent down payment initiative is unlikely to open the nation's lending spigot enough to make either a negative or positive impact. In North Texas, Realtor Jana Ward with Keller Williams is already experiencing home price inflation since her local market has more buyers than sellers. She rarely finds a borrower hunting for a lower down payment. "It's hard to say if it is going to have a huge impact," she explained. "It will certainly help somebody." But this veteran real estate agent echoes the oldest words of wisdom in the business: "The more you put down, the less your monthly payment is." Given the perilous financial nature many consumers find themselves in these days, the idea of entering a real estate transaction with less skin in the game seems almost absurd. But as the old saying goes, those who cannot remember the past are condemned to repeat it. Track our progress at

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