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I have theorized about the 20% Downpayment Myth on the blog and in trade rags such as Chicago Real Estate Executive.
Why do banks like to see a home buyer make a downpayment of at least 20%? Because that's the typical "discount" offered on homes against which the mortgage has defaulted. If a homeowner has a 20% stake, the bank has nothing to lose. Literally.
Except now there's this anecdote coming from San Diego via The Wall Street Journal Online.
A real estate investor at a home foreclosure auction reports that high bids averaged roughly 67 percent of the last home sale price -- mostly from 2004 and 2005. If a buyer put down 20% at the point of purchase, therefore, the bank is still 13% in the hole.
If the buyer did not put 20% down and the property was insured with PMI, the bank is still at a 13% loss.
In other words, banks in San Diego are taking losses on loans and on the underlying collateral, too. If the stories from San Diego spread to Chicago, Cincinnati, or elsewhere, it could scare even more lenders out from the mortgage lending arena. That would reduce consumer choices and, therefore, increase the costs of getting a home loan.
Dan Green (NMLS #227607) is an active loan officer with Waterstone Mortgage. Email Dan ator call 513-443-2020.
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