The "Default Episode"
June 18, 2008
According to an article that I read recently, "default episodes" have occurred every 12 to 15 years. Because they occur so infrequently the credit markets seem never to be adequately prepared. When these "episodes" occur government as well as the banking community develop plans to alleviate the hardship that is experienced by homeowners and creditors.
Mortgage insurance that was required for all loans with less than a 20% down payment was instituted to protect lenders from the risk of loss when a homeowner defaulted. In our 21st century housing cycle, mortgage brokers and borrowers developed a way to avoid paying the mortgage insurance. (It was still a requirement on FHA loans, but the maximum mortgage amount was less than most selling prices so FHA loans were few and far between in California real estate markets.) Buyers who did not have a 20% down payment would finance with an 80% first trust deed and a 20% second trust deed or an equity line of credit. Mortgage insurance was avoided.
As lawmakers and the credit market reflect on solutions for the future, it is likely that easy credit and 100% financing will be extremely difficult or impossible to obtain. As of today, there are still 100% loans available, but the government and the banking industry are anxious to change the requirements. New mortgage insurance programs are being discussed. It is a little like locking the barn door after the horse has gotten out.
According to an article that I read recently, "default episodes" have occurred every 12 to 15 years. Because they occur so infrequently the credit markets seem never to be adequately prepared. When these "episodes" occur government as well as the banking community develop plans to alleviate the hardship that is experienced by homeowners and creditors.
Mortgage insurance that was required for all loans with less than a 20% down payment was instituted to protect lenders from the risk of loss when a homeowner defaulted. In our 21st century housing cycle, mortgage brokers and borrowers developed a way to avoid paying the mortgage insurance. (It was still a requirement on FHA loans, but the maximum mortgage amount was less than most selling prices so FHA loans were few and far between in California real estate markets.) Buyers who did not have a 20% down payment would finance with an 80% first trust deed and a 20% second trust deed or an equity line of credit. Mortgage insurance was avoided.
As lawmakers and the credit market reflect on solutions for the future, it is likely that easy credit and 100% financing will be extremely difficult or impossible to obtain. As of today, there are still 100% loans available, but the government and the banking industry are anxious to change the requirements. New mortgage insurance programs are being discussed. It is a little like locking the barn door after the horse has gotten out.
posted by shirley harry at 9:00 AM
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