EARLIER THIS YEAR FANNIE MAE AND FREDDIE MAC announced programs to help more people into homeownership. The programs lower minimum down payment requirements, making it easier for folks to buy their first home. Shortly after the Fannie and Freddie announcements, the Federal Housing Administration announced a lowering of monthly mortgage insurance premiums on their programs, making FHA loans more affordable and thereby lowering home buyers’ expenses.

A common reaction of many who want to talk to me about these changes is fear. The line usually goes like this: “I am worried that with these new programs we are headed back down the path that got us into so much trouble.”

To best understand the difference between then and now, you have to understand the basics of mortgage loan qualification. Lenders evaluating a home loan request are looking at four items: income, or more specifically, whether the borrower has sufficient verifiable income to have the ability to repay the loan; credit, whether the borrower has demonstrated the ability and willingness to repay their debts in a timely fashion; whether the borrower has sufficient assets for the down payment and closing costs associated with the loan request; and collateral — in other words, whether the collateral sufficient to back the loan request.

In the years leading up to the housing crisis, lenders ignored all four of these factors. Hard to believe, but true — prior to the crash, loans were available that did not require verification of income. A janitor could state he was an environmental engineer and claim he made $200,000 a year. The same person could have a credit score as low as 580, and to sweeten the deal, he didn’t have to put any money down. In some cases you could buy a home with less background information than it took to rent an apartment.

The lack of qualifications made it easy enough that just about anybody could buy a home. This created an artificially high level of demand that drove the values of homes upward, creating an artificially high level of value, which meant you had people who had no business buying homes doing so for far more than the homes’ realistic and sustainable values.

Is it any wonder that the housing market crashed, when you had all four legs of the qualification grid on wobbly ground?

Down payment requirements have been eased and FHA has lowered its insurance fees. This doesn’t change the fact that borrowers must document their income, and that their income must be sufficient and likely to continue. It also does not change the fact that borrowers must demonstrate a willingness and ability to repay their debts.
There are steps being taken to make it easier for people to buy homes. But this is not a return to the insanity of the early 2000s — at least not yet.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or guyb@fairwaymc.com.height=”150″ />

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