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Monday, July 14, 2008

Dumb Luck Investing Update

Years ago, I thought it unfair that people were required to scrape together 20% of the value of a house as a down payment. The monthly cost of renting was equal to (and sometimes more than) what the monthly payment of principal, interest, and taxes would be for purchasing a home.

There were ways around the 20% rule. If you were credit worthy, mortgage companies could offer third party mortgage guarantee insurance, which upped your monthly payment but spared you from at least part of the 20% rule. Once your equity equaled 20% of the homes value you could often have the insurance dropped, or you could refinance without it.

Somehow, the mortgage industry got away from some fundamental rules and started offering loans without verifying incomes. If mortgage guarantee insurance was still required, I am not sure why we would be having a problem now, unless of course the losses were large enough to bankrupt the insurance companies.

For whatever the many reasons, the system allowed the waiving or bending of too many rules, and too many loans went to people not able to make payments. However unfair the 20% down payment rule seems, it looks like we should return to it as a standard. It would not hurt to go back to the practice of verifying the buyer’s income and existing debts.

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