PEOPLE WALKED AWAY FROM MORTGAGE OBLIGATIONS B/C THEY WERE UPSIDE DOWN
In 2006, a relative of mine asked me to help her qualify for a condo purchase. Wanting to help, I loaned her enough money to clean up her credit, to pay off her consumer debt and to make a down payment. I then cosigned for a very competitive 7/1 ARM that kept her total debt ratio under 33% (I wanted to make sure she never had trouble making payments).
In 2011, when the value of her Scottsdale condo had dropped by almost 50% and she was way upside in her property, she emailed me to let me know she was walking away from the condo, leaving me to make all the payments. She also reneged on paying back the money she owed me. Her rationale was that I put her into a “predatory loan” and that her “payments were unaffordable” (repeating what she heard in the news).
But here is the point of the story: Her “A-paper” loan payments were very affordable and the sole and only reason she walked was b/c she was upside down.
And that is the dirty little secret of the post-2008 foreclosure crisis – people often walked away from their mortgage obligations simply b/c they were upside down; it was not b/c they couldn’t afford their payments.
I thought of the above story yesterday when I saw the new 2019 Conforming Loan Limits.
NEW CONFORMING LOAN LIMITS
In 2019, the Low Balance Limit will increase to $484,350 from $453,100. And the High Balance Limit will increase to $726,525 from $679,650.
FHA will likely follow suit with similar loan limits, if they haven’t already, and this is the third straight year that loan limits have increased.
THE GOOD
Higher loan limits are good for the mortgage and real estate industries b/c they allow more borrowers to get into homes with much smaller down payments and much less stringent underwriting standards than jumbo lenders require.
THE BAD
When borrowers can obtain a $726,525 mortgage with as little as 5% down (or 3.5% down for FHA), many of them are likely to walk away from their mortgage obligations if property values ever decrease to the point where the borrowers are upside down.
An onslaught of foreclosures is bad for a variety of reasons, as we have seen. Among other things, they further depress property values, they increase the cost of mortgages, and they can end up costing taxpayers considerably if the government has to bail out FHA (likely) or Fannie and Freddie in any way.
