Home Loan Default

What's a Reasonable Home Down Payment?

That question is part of a debate in Congress and among a cluster of federal regulatory agencies as they try to craft new rules for mortgage lenders following the housing debacle.

As part of the financial reforms mandated last year by the Dodd-Frank law, the agencies, including the Federal Reserve, the Federal Deposit Insurance Commission, the Department of Housing and Urban Development and the Federal Housing Finance Agency, among others, must set criteria for what constitutes a reasonably safe, plain-vanilla mortgage.

Lenders issuing such mortgages — what are to be called “qualified residential mortgages”  — will be able to sell them to investors and avoid retaining any of the risk associated with a default of the loan on their own books. Loans that don’t meet the new standards won’t be considered qualified and will be considered riskier so the lender will have to retain 5 percent ownership. The goal is to encourage banks to thoroughly vet a borrower’s ability to repay the loan. In other words, the banks must have “skin in the game” for loans that don’t meet the standards by setting aside extra capital for possible defaults.

The agencies proposed requiring qualified mortgages to have a down payment of 20 percent , but that idea provoked a firestorm of opposition from an unusual alliance of banks, real estate agents and consumer housing advocates. The Center for Responsible Lending, which has been vociferous in urging financial reforms to protect borrowers, argued that 20 percent down, or even 10 percent down, would price many homeowners out of the mortgage market. Many creditworthy borrowers would find it difficult to meet the down payment rule and would end up paying more for their loans because lenders would boost interest rates on their loans to cover their extra costs, the center argued.

The group’s Web site has a chart showing the length of time it would take borrowers of different occupations to save enough for a 10 percent down payment . A public school teacher at the median salary of $33,530, for instance, would take 14 years to save enough cash to buy a $173,000 home.

Kathleen Day, spokeswoman for the center, said a borrower’s ability to repay a loan should be determined by thorough underwriting, that is, an assessment of risk through examining a borrower’s credit history, income and debt, by the lender.

“We’re not advocating for zero percent down,” says Kathleen Day, spokeswoman for the center. “We think down payments are good. But we think the market should set them, based on the underwriting.

Thornburg on Verge of Bankruptcy after Chase Exercises Default ...

Jumbo loan lender Thornburg Mortgage disclosed late Wednesday that after failing to meet a $28 million margin call, JP Morgan Chase exercised its default rights under the agreement.

Chase had previously lent Thornburg $320 million, and its inability to meet the requirements associated with that deal led to more defaults under all of the company’s other reverse purchase agreements and secured loan agreements.

Bad news. And if the Santa Fe, New Mexico-based mortgage lender is unable to sell assets or raise enough capital to meet the margin calls, it could face bankruptcy.

Here is the full text from the form 8-K filing released by the company earlier today:

“Thornburg Mortgage, Inc. (the “Company”) has entered into reverse repurchase agreements, a form of collateralized short-term borrowing, with various counterparties.

The Company received a letter from JPMorgan Chase Bank, N.A. (“JPMorgan”), dated February 28, 2008, after failing to meet a margin call of approximately $28 million. The letter states that an Event of Default as defined under that certain Master Repurchase Agreement, dated as of August 3, 2006, as amended on February 7, 2007 by and between the Company and JPMorgan (the “Agreement”) exists.

The letter also notified the Company that JPMorgan will exercise its rights under the Agreement. The aggregate amount of proceeds lent to the Company under the Agreement was approximately $320 million.

The Company’s receipt of the notice of an event of default has triggered cross-defaults under all of the Company’s other reverse repurchase agreements and its secured loan agreements. The Company’s obligations under those agreements are material.”

Since mid-February, Thornburg has faced nearly $600 million in margin calls after UBS revealed $26.6 billion in Alt-A securities, leading to the price deterioration for such securities.

On Monday, the company announced that it had raised roughly $1 billion in collateralized mortgage debt to improve liquidity, but it’s unclear if they’ll be able to keep up with their obligations.

Shares of Thornburg, which fell 16 cents to $3.40 in regular session trading Wednesday, plummeted another $1.40, or 41.18%, to $2.00 on the news.

Earlier in the day, the stock was downgraded from “buy” to “hold” by a Jeffries & Co. analyst after a previous downgrade Tuesday by RBC Capital Markets from “sector perform” to “underperform”.

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