There are so many lessons to be learned from the events of the past 10 years. Looking back, hindsight is only 20/20 if we have our eyes open. In reality, hindsight is 80/20.

Much attention is paid to first-time buyer activity because this segment drives the real estate market. When a first-time buyer buys a starter home, they release that seller to trade up and buy again, bumping yet another person up the ladder or into the hands of a builder. The entire market is dependent on the 30-something first-time buyer and the residual sales they can create. Each buyer can cause three or four ripple sales, with builders at the top of the food chain.

In 2006, first-time buyer activity began to slow down. Overlooked data showed that there was a drop in birth rates in the 1970s, which would have predicted a drop in first-time buyers roughly 30 years later. This occurred in the same year that the 55-plus market first entered their 60s. The stage was set in 2006 for the perfect demographic storm and a skewed ratio of over-supply vs. under-demand. It was predictable—and avoidable.

The sudden shortage of 30-something consumers and lack of demand at the bottom of the market caused insufficient absorption and stockpiling inventory. Homeowners who could afford to do so began to lower their prices to attract a buyer, but homeowners in distress who couldn’t afford to lower their prices couldn’t compete. After a period of insufficient demand, foreclosures began to rise.

As foreclosures started getting everyone’s attention, the focus turned to the types of mortgages that were being foreclosed, and the whole nation learned about sub-prime lending instead of asking what happened to all the demand?

People typically participate at different levels in the housing market based on their age, but the population is not evenly distributed by age. The enormous baby boom is immediately followed by a much smaller group, and that group is then followed by a large echo boom. It stands to reason that this would cause an imbalance in supply or demand in each respective market segment.

Rather than continuing to take a one-size-fits-all approach, a strategic approach must be implemented to ensure stability in the housing market despite this age imbalance.

Ten years ago there was a sudden shortage of 30-something consumers. Today, there’s a shortage of 40-something consumers. Consumers in their 30s buy their first house and those in their 40s trade up. After waiting for the echo boom to reach financial maturity, the market now needs first-time buyers to do double duty. They are needed to not only come in at the bottom, but also to leapfrog their older cohorts to offset that shortage. Meanwhile, baby boomers are entering their 70s and the market stands to realize a flood of retirement inventory. There’s no strategy in place to address this imbalance and it won’t happen on its own because the first-time buyers that drive it all are paying the penance for past behaviors.

First-time buyers are now saddled with student loan debt and outrageous rent levels, making it more difficult than ever to save money. At the same time, new regulations have increased down payment requirements, raised upfront MIP premiums, and restricted allowable assistance. New regulation has hogtied the very people the market depends on. It demands they have some “skin in the game.”

Translated, that means “they had no down payment so they just walked away.” The truth is that many of them were ideal FHA candidates. But they were converted to conventional 80/20 loans by lenders who figured out that they could circumvent regulation by selling perfectly qualified FHA buyers an 80/20 instead. The sales pitch: “I’ll save you that PMI.”

This is evidenced by looking at the decline in FHA loan origination in the years preceding the crash, despite the record number of sales.

There’s a huge difference among a minimum down FHA loan, a VA loan at 100%, and an 80/20 buyer who borrowed 100%. It’s called insurance.

There’s a reason for mortgage insurance and while it may not protect the buyer at foreclosure, it sure protects them during the process. The insurance companies make the rules, by dictating the qualifying criteria such as employment, credit, funds, ratios and all the qualifiers.

If the buyer doesn’t meet the standards, the loan can’t be insured. These qualifying elements were successfully bypassed by combining two loans, one at 80% and one at 20%, neither of which required PMI. By circumventing PMI, the lender circumvented regulation that worked and stripped the buyer of the protection embedded within the PMI process.

Buyers thought this was a cost savings loan, but without advanced financing knowledge had no way to know they had been put on a path to foreclosure, losing their homes only to be criticized for not having skin in the game. The skin-in-the-game mantra needs to be reassessed and restrictive regulations revisited.

It should be mandated that every mortgage be insured in order to qualify as a recordable lien against a property, regardless of loan-to-value. Guaranteeing oversight at loan origination ensures the maximum consumer protection and prohibits the return of this practice. Want a quality residential mortgage? Require insurance.

Today, as the boomer generation enters its 70s and a potential flood of inventory becomes imminent, letting the market take care of itself isn’t an option. This nation has never had an aging, retiring, liquidating baby boom before, and the time for a strategy to guarantee absorption is right now.

Solution: An FHA product that allows a declining down payment schedule for buyers who qualify for more home than they choose to buy.

Buyers who purchase at 80% or 90% of their qualifying level should have access to an FHA product with a proportionately declining down payment scale. A buyer who qualifies for $200,000 but conservatively chooses to buy at $160,000 shouldn’t have to wait to save a $10,000 down payment. Once established by FHA, this product could be duplicated on the conventional side with established guidelines.

The combination of these two measures 1) requiring PMI on any mortgage to qualify as a lien and 2) an FHA product with a reduced down payment requirement using a sliding scale will safely open homeownership to well-qualified first-time buyers and stimulate the market in a responsible way.

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