How can you underwrite for possible price drops of 20-40% in the next 5 years? If you think this is a real possibility, then it seems no loan should be made unless the buyer has at least 20-40% of a downpayment of their own money, net of a hard-headed realistic current appraised value. I don’t see how you can charge enough on a 95%, or even a 90%, loan to cover the risk. If there’s a 50% chance of losing 20% of the loan principal 4 years from now, for example, then you’d have to charge 250bp extra, and that’s with spotless credit.
Do any of the mortgage experts here think rates on new 90% LTV 30-year fixed jumbo mortgages to people with spotless credit is going to be at least 250bp over the risk-free conforming rate for the next 12 months or more, not just this month? Unless that happens, there’s inadequate compensation for the risk to the lenders, and either the taxpayers will have to subsidize them thru’ FNMA insurance etc, or else investors will eventually quit feeding this kind of dumb money to buyers when they finally realize the price drop will go beyond 5-10% in places like Southern California.
