Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
I just read two articles that you HAVE to see.
The first one was titled: “The Housing Recovery is Faltering”
And the second one was titled: “BBVA Compass launches zero-percent down mortgage program”
Um, yeah. The first thing that hit my brain was the Yogi Berra quote – “It’s like déjà vu all over again.”
Because, correct me if I’m wrong, didn’t we just go through this a few short years ago?
Let’s look at both pieces individually. The first one on the faltering recovery was pretty definitive about it. They wrote:
“The housing recovery is faltering. While prices and sales of existing homes are close to normal, construction and new home sales remain weak. Before the current business cycle, any time housing starts were at their current level of about one million at annual rates, the economy was in a recession,” says David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices.
And that:
“The softness in housing is despite favorable conditions elsewhere in the economy: strong job growth, a declining unemployment rate, continued low interest rates and positive consumer confidence.”
They went on to explain that existing-home sales cooled in January, to their lowest rate in nine months. And that total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 4.9 percent in January, which was the lowest since last April.
Even the usual suspects at NAR, who are masters of spin and can spin a full-blown recession into the rosiest scenario that you’ve ever seen sound worried.
They wrote that:
“January housing data can be volatile because of seasonal influences, but low housing supply and the ongoing rise in home prices above the pace of inflation appeared to slow sales despite interest rates remaining near historic lows.”
Not good. Not good at all.
And it gets a lot worse when you take the second article into consideration.
The government is “helping,” again.
It seems that in recent months, the Obama administration has taken several steps to expand the credit box and make it easier for borrowers, especially first-time homebuyers, to buy a home. To that end, in October, Fannie Mae and Freddie Mac announced 97% loan-to-value offerings.
The article stated that for some borrowers, saving up 3% for a down payment is still a hurdle they can’t quite clear. However, a new program from BBVA Compass will allow borrowers to put down even less for a down payment, in fact.
So guess what happens when saving for a paltry 3% down payment is just too difficult?
Well, you launch a new program of course!
The new one just launched is called Home Ownership Made Easier or HOME for short.
Isn’t that a cute acronym? I mean, who could argue against a program like that?
Well, as you can probably guess, the HOME program is designed to help low- and moderate-income borrowers become homeowners by helping to overcome one of the “most significant barriers” to homeownership, the down payment.
Otherwise known as – the skin in the game.
In the HOME program, qualifying borrowers will be eligible to finance 100% of the home’s value. In addition to offering 100% LTV loans, BBVA will also contribute up to $4,500 toward closing costs associated with obtaining a home loan.
So in reality, it’s not just a zero-down program, it’s a we’ll-even-pay-you-$4500-to-buy-a house program.
Are you freaking kidding me?
The idiot in change of the program said this. And I quote:
"We've built a comprehensive program that will help many people across our footprint realize the dream of homeownership — something that may have seemed unattainable to them in the past."
"The financing and closing cost assistance, and the essential homebuyer education, will help ensure they enjoy the benefits of their new home for years to come."
And they are also doubling down on stupid – because the HOME program is part of the bank’s recent commitment to put $11 billion in lending toward supporting low- and moderate-income individuals and neighborhoods.
Said another way – this idiot bank is betting $11 billion of depositor funds on this reckless program that has been proven, without a shadow of a doubt, not to work.
I’m glad that I don’t own stock in that bank, that’s for sure.
But it gets better. Or worse.
I guess it depends on where you sit.
You see, the bank didn’t think it was challenging enough to just offer zero down plus $4,500 toward closing costs. Nope. They obviously didn’t think that was risky enough.
So they decided to really stack the cards against themselves with three other totally bonehead moves. Which are, if you can believe it:
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Under the HOME program, there will be no private mortgage insurance requirements
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The subject properties must either be located in a low-to-moderate income census tract
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Or the loan applicants cannot have an income greater than 80% of the median income for the area
Haven’t we seen this movie before?
Don’t we already know how it ends?
Stupid. Crazy stupid.
Because as Einstein once said – “The definition of insanity is doing the same thing over again and expecting a different result.”
Fasten your seat belts. It looks like the housing market is in for some rough seas ahead if this idea spreads like it did last time.
Lemme hear from you.
What do you think about the HOME program? Talk to me in the comments section below.