Traditionally, a 20 percent down payment was standard on a mortgage loan. Ten or fifteen years ago, that changed, and lenders began offering loans with much less money down. This was good for younger families or first-time borrowers, because it meant that they could get into a home more quickly. With the recent mortgage crisis, the trend is heading back the other direction again — lenders are requiring more money down. Often this translates into a 20 percent down payment for a mortgage loan. So many borrowers are asking, “Why 20 percent?”

At least part of the reason is that mortgages are considered a non-recourse loan. That means the only security the bank has in making the transaction is the property itself. If for some reason you default on the loan, the lender can recover the property, but cannot hold you liable for any other costs.

Imagine that you are buying a $300,000 home. You only put down 5%– or $15,000. Now, imagine you are getting behind on your loan payments. You decide to take out your anger on the lender, by trashing the property. When the lender takes you to foreclosure, he is left with the property that is worth much less than $300,000, yet you still owe a sizable amount on the one. He’s going to lose a lot of money. If he had required 20% down, or$60,000, he would have had a better chance of recouping at least part of his investment.

The same thing could happen if the value of your property has dropped, due to the current market conditions or other reasons. So you can see that the most important assessment, a lender has in deciding whether to make a non-recourse loan is your own credit, and his ability to determine how credit worthy you are. Now isn’t the 20% making more sense?

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The media has made a really big deal in recent weeks about mortgage insurers flagging certain ZIP codes and refusing to inshore home loans in those areas. This decision affects homes in at least 34 states, about 9600 of them. But when you take a closer look, you can see why these particular loans might be risky.

The home loans that mortgage insurers don’t want to cover are as follows:

• Investment loans.
• Loans for second homes.
• Adjustable-rate mortgages.
• Interest-only mortgages.
• Loans with a down payment of less than 3%.

In fact, many of these insurers won’t even be in business a year from now. They are facing billions in claims from lenders due to mortgage holders not making their payments. So, although it may be a little late, they’re trying to protect their business.

Why this will really mean for homebuyers, or people who want to refinance, is probably that they will have to make higher down payments. There will also be a higher requirement for credit scores. And those who were considering subprime loans may find that they no longer exist.

The bottom line is, if you’re trying to get alone for a home that is in a potentially declining market, the lender may require more money — if he’ll make a loan at all. Some people who are trying to get a second mortgage find that it’s no longer possible, as are some who wish to borrow more than $650,000.

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With the fall of Bear Stearns, many other banks are getting a good looking at.  In an article in the Baltimore sun, the journalist Peter Morici makes some very good points about the current mortgage situation.  I quote him often here.

Mr. Morici makes it clear to us all the way things have changed over the years.  He states that 30 years ago, a borrower went to a bank, income and assets were examined by the loan officer, and if you qualified, you got your mortgage.  Today, however, it is a very different matter.  According to Mr. Morici, banks have lost touch with how business was done.  He states that “Loan agents hang around real estate offices, take applications and forward those to mortgage companies or regional banks. Those sell the notes to large Wall Street banks or securities firms that increasingly do most of the things banks do.”  Surprise, surprise.  Whoops! There went Bear Stearns.

It seems to me it all boils down to greed.  This is what has driven the market into the hole it is in now.  A quick buck is okay, but when doing so you drive the economy of one of the greatest nations in the world into the crapper, then possibly things should change?

Wall Street banks have bundled mortgages, good and bad, into securities and sold them to investors, hedge funds and pension plans.  There seems to have been little regulation in this practice, outside of who gets the biggest piece of the pie.  Now we see the Fed doing a bailout for one of the banks that got us to where we are in the first place.  Yet, the blue collar workers and unsuspecting retired people who are facing closure are hearing “sorry about your luck.”  The current proposal to help ease this situation is a fine gesture, but helps few people.  Yes, they are responsible for the hole they have gotten themselves into.  fulfilling the American Dream is not suppose to mean, though, that an unethical lender can give you a fast ride on a one way ticket to the poorhouse.  It should be that people currently in trouble should have some knowledge of what they have gotten themselves into, and if they had decided to go forward, then it was certainly their problem.  That does not, however, seem to be the case.

Now the Feds are scrambling to pull the whole economy out of the fire.  The action with Bear Stearns will probably be the first of many.  The rumblings and anxiety on Wall Street is a good indicator of that.  It really boils down to consumer confidence, doesn’t it?

According t Mr. Morici, no one now will touch a mortgage backed security with a ten foot pole.  You have to admit this is a bit understandable.  Doing so, however, puts us further in the hole, because no money is flowing.  The NBC Nightly News reported this week that consumers are depended on to provide the flow of cash in this economy to a very large percentage point.  I am thinking that if the people can see every night where the economy is going, that their shekels are going to stay under the mattress.  And then, the economy will suffer even more.  Already, major stores are reporting lack of sales, and it is trickling down to Main Street.  How much further does it have to go?  Inquiring minds want to know…