The U.S is Set Up for Another Housing Crash.

Even today, the United States is readying another housing crisis.

DS News found that while the the mortgage default rate  was rising as of the end of last year, it was not enough to become a crisis- yet.

“The first mortgage default index – one of four indices that make up the composite – ticked up by two basis points from 0.82 percent up to 0.84 percent. December marked the third consecutive month with an increase for the first mortgage default rate, which climbed by one basis point in November and five basis points in October,” they said. But, “Even after the three straight months of increases, December’s first mortgage default rate was still down by 18 basis points from December 2014’s rate of 1.02 percent.”

But banks AND buyers are setting themselves up for another crash.  Recently, all major banks (Bank of America, Chase and Wells Fargo) announced new 3% down mortgage loans.  This means that buyers have even less skin in the game than an FHA loan which requires 3.5% a down-payment.

The new BOA package, Affordable Loan Solution Mortgage, has a 3% down-payment and no PMI, or private mortgage insurance.  To qualify, borrowers can’t make more than the HUD area median income and must have a credit score of 660 or higher.   So if these loans go belly-up, the banks are not covered by any insurance and surely will be coming after consumers for the debts; unlike most of the banks during the crash who et the borrowers walk away as the lenders were paid by the PMI insurance.

SoFi, an online lender initially focused on offering a student loan refinancing product, now originates mortgages in 25 states and Washington D.C. SoFi’s mortgages allow borrowers to put down as little as 10% without requiring PMI,” they said.

Even more concerning: “While traditional lenders may have firm debt-to-income limits (generally up to 45%), SoFi has more fluid debt-to-income limits, which may allow borrowers to ultimately qualify for more financing, up to a maximum of $3 million.

Refinancing is also another controversial area.  “The FHA Streamline is a refinance mortgage loan available to homeowners with existing FHA mortgages,” said The Mortgage Reports. “The program simplifies home refinancing by waiving the documentation typically required by a bank, including income and employment verification, bank account and credit score verification, and an appraisal of the home.”

The Streamline Refinance does take into account a borrower’s payment history.  All of the other requirements that banks require to judge the worthiness of a buyer and a purchase are gone. Again, great for a borrower, maybe not so much for the lender.

Adjustable rate mortgages also appear to be making a comeback   So for now people can get a relatively cheap mortgage while rates are low and at a low introductory rate on an ARM.  But come 5 years when the rates adjust, borrowers could find themselves with unaffordable payments yet again; a replay of the prior crash.

ARMs and requiring 3-3.5% down really tests the  market.  If values tank and you only had 3-3.5% equity int he property, there will be tens or hundreds of thousands of homeowners back underwater again into a whole new crash.

Only time will tell.

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