BiggerPockets

Banks have led a great many people to believe that the mortgage mess exists because too many loans were given at or around 100% LTV.

That is hogwash spread by banks because they don't have access to the free Wall Street money they used to have access with.

Wall Street got a hold of $27 Trillion somehow. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a0jln3.CSS6c

They had to spend it. The equity "supply" was manufactured because of this once-in-a-life-time "demand" from foreign money.

Residential sell based on DTI (debt to income) and commercial sell based on NOI (Net Operating Income), CAP Rate and DSCR (Debt Service Coverage Ratio) which are three very inter-related numbers.

Many residential underwriters approved loans at DTIs of 60%, 70% and I have heard over 100%.

Commercial lenders approved loans at DSCRs of less than 1.2 (Income 20% above mortgage payments), 1.1 (Income 10% above mortgage payments) and even 0.95 (Income 5% below mortgage payments).

This is how the mess was created and NOT because of lack of down payments.

The new owner has got to have money in his/her hand to take care of emergencies; whether it is furnace blowing up or losing job. "Donating" 10% or 20% to sellers does not do anyone any good.

Not a whole lot of people get this at the core level.

Negative amortization loans are nothing new. They were common when I moved to Houston in 1982 and interest rates were in the high teens.

So - just making sure I am reading your position - your saying the main reason we are in this mess is because of DTI - not because people didn't have to make down payments - is that correct?

Your last paragraph confused me (unless I got that first part wrong!) you said "The new owner has got to have money in his/her hand to take care of emergencies; whether it is furnace blowing up or losing job. "Donating" 10% or 20% to sellers does not do anyone any good."

So - if a seller doesn't have any money to pay for a down payment ("donation" to the seller as you put it) and gets a 100% or 95% loan - doesn't that mean they also don't have any money for a furnace problem or other capitol expense?

Also are you talking about investors or home owners - sorry to be so dense - just not following your point and I would like to.

Ali,

I strongly agree with your suppositions, and I'll add a few of my own. Many buyers paid too much for their homes, didn't understand the underlying mathematics involved, didn't understand the financial instruments they were using, used their properties like ATMs, and didn't understand enough about business and economic cycles to filter through all of the "buy buy buy . . . it's always a great time to buy" noise spewed by many others (including many RE pros) who also were equally clueless.

The "no down-payment equals no 'skin in the game'" argument is a non sequitor. Unless a borrower doesn't pay any closing costs, fails to make the first monthly payment, and gets foreclosed upon, then the buyer has skin in the game--albeit with low or no equity--and keeps adding more chunks of skin monthly.

The "higher down-payment decreases the likelihood of an owner walking away from a home" argument is also a non sequitor. Most people who end up losing their homes don't choose to walk away, because they had a low or no down-payment. Rather, most of them lost their homes, because something(s) in their lives changed--some studies show that roughly 70%-80% of the foreclosures were caused by excessive medical costs. Additionally, many people who use that 'higher down-payment' argument ignore the fact that a lot of homes, that were purchased at lower LTVs (70% or less), have also been foreclosed upon. I'm sure than any HMLs here can confirm that they've foreclosed on homes purchased at lower LTVs--even during the boom years. The point is that most people, who can afford to pay, continue to pay.

Scott, my position is that banks' underwriting models are seriously flawed and that banks create booms and busts in real estate and I have written a whole 200 page book to outline the problem and recommend solutions to eliminate booms and busts in real estate forever with the engagement of private money.

What position are you taking then?

Once again. Debt-to-income IS the main issue regardless of how it came about; health, job loss, divorce, bad tenants, etc. When I talk about DTI I am not talking about DTI at the time of the origination of the loan. I am talking about "dynamic DTI" which will vary throughout the duration of the loan.

Down-payment IS NOT the main issue. Someone could have put down 20% and the value of the house went down 40%. The owner is in a hole of 20% which has happened in many MSAs.

Note: The prices are currently at 2003-2004 prices range. If anyone is buying at those price-points then there is a big chance that they are taking risk of losing 20%-30% which may or may not happen. I am advising my clients to purchase at 2000 prices to make sure that they don't lose any equity.

Now if buyer's income situation is under control, then he is going to rough it out.

If his income situation is not under control then he is going to walk away from the property regardless of how much money he put down.

I don't think that there is much to be added to this debate between what I have written and what Dory has written.

If you don't agree, then we can agree to disagree and move on. :)

Scott, the point is not that Dory and I have spoken and the case is closed.

The point is that instead of just saying "you haven't convinced me" you need to present your counter-argument. If you think that DTI is not the major issue, then what is?

If you have time/interest in presenting a counter argument then the debate CAN be extended. Otherwise, I am not going to shoot in the dark to try to convince you. That's all.

Eddie,

Banks are not in the business of promoting commerce. It is us who think that we have a great asset class, we provide decent housing to fellow citizens, etc. Banks hate real estate. It is our affinity with real estate which banks capitalize on.

Banks are rent collectors of a different kind that base their underwriting decisions on pain infliction. That is, bring 20% down. It MUST be your own money. If you are 15 days late, we will throw you to credit dogs, etc., etc.

Most of us need banks because we have not cultivated our fund-raising skills and have not learned and mastered the securities framework which allow us to raise money without banks' silly underwriting requirements.

We must position ourselves as money magnets so that people invest money with us directly instead of donating it to banks (at 1.75% ROI) and Wall Street (free money, no guarantee) which make it available to us. We can then acquire properties without going through banks' silly underwriting requirements.

Trying to convince banks on logical grounds is a waste of time.

Eddie, you should forget the bank and focus on private money.

Visit my website and download the free report on bank free investing. If you have any questions give me a call, I can answer any questions you may have about private money.

Private money. . .It's a beautiful thing. :)