clifp,
...So how is that working out for Fannie and Freddie? Seems like I heard something about them coming onto hard times. And how come I hear about so many people geting conventional mortgages with way less than 20% down? Are those conforming or not? There sure are a bunch of them. My specific problem with the conforming mortgage as you descibed it is that people can have 40% of their income going to debt service. Their company has a bad month or two and cuts back hours and they are in trouble. I appreciate that you are being a good sport here.
Jeff
As others have pointed Freddie and Fannie problems for the most part don't stem from conventional mortgages (20% down, fixed back end ratio <40%). Even ARMs per-se don't cause a major problem since the rates have been pretty stable. (Depending on the index and when the ARM was taken the interest rate could have actually dropped) The problem was
all the creative and in hindsight crazy ways lenders stretched the safety limits of conventional lending practices, teaser rates, Option ARMs... Yes Freddie and Fannie were complicit in helping out, by securitizing increasingly dodgy debt.
It seems to me there is "holy trinity" of lending; sufficient collateral, ability to repay, and propensity to repay. Banks can be can be flexible on one of the criteria so for example requiring less than 20% down, providing teaser interest rates, or lending to people with less than perfect credit history.
The problem was that all too often lenders eased up on all three criteria simultaneously, leading to nuttier loans, like 95% LTV, Option ARMs to people with 500 FICO scores.
The good news with housing pricing coming back to earth is that people with modest income can now afford houses with traditional mortgages. Which was the point of my original post about my niece.