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Zero-down mortgages are back
CNN –
Many Americans would love to buy a home but don’t have tens of thousands of dollars for a down payment.
This enormous obstacle is being removed by a new mortgage program with zero percent down payment launched two weeks ago by one of the country’s largest mortgage lenders.
However, the new program, offered by United Wholesale Mortgage, is making some experts nervous about how these loans could backfire on homeowners — especially if home prices stop rising to the moon. And for some, it’s bringing back bad memories of subprime mortgage collapse that fueled the 2008 financial crisis.
UWM, led by Mat Ishbia, the billionaire owner of the NBA team Phoenix Suns, said home buyers who qualify will not need to make a down payment.
Images by Christian Petersen/Getty
Phoenix Suns owner Mat Ishbia looks on during the first half of the NBA game against the Oklahoma City Thunder at the Footprint Center on March 8, 2023 in Phoenix, Arizona.
Instead, the program will allow buyers to pay 97% of the home’s value with a first mortgage and then provide the remaining 3% (up to $15,000) in the form of a second mortgage.
This second mortgage will not accrue interest, but will need to be repaid – in full as a down payment – when the home is sold, the mortgage is paid off, or if the homeowner refinances.
‘The demand has been enormous’
These mortgages are only open to first-time homebuyers and those earning no more than 80% of the area median income.
“The initial demand was enormous. We already have a few thousand loans submitted,” Alex Elezaj, chief strategy officer at UWM, told CNN.
UWM said no other wholesale lender or non-bank mortgage company is offering such a program nationally. (UWM is a wholesale lender that connects homebuyers and real estate agents with mortgage brokers through its Mortgage Matchup platform. Earlier this month, Mortgage Matchup was named the first mortgage partner of the NBA and WNBA.)
However, some worry that this type of mortgage could cause problems for homeowners in the future.
The central risk is that, by not paying anything upfront, owners start without equity.
This means they would instantly be underwater (owing more than the value of the home) if the hot housing market suddenly cooled and home values dropped.
This can be a problem if the owner needs to sell quickly, perhaps because they have lost their job, are facing financial difficulties or need to move.
Suddenly they would have to pay the second mortgage. And because they are underwater, selling the house will not generate enough money to pay off the debt.
“If the homeowner doesn’t have the money to make up the difference, he or she will default on the second mortgage and be at risk of foreclosure and damaged credit,” said Patricia McCoy, a professor at Boston College Law School.
This scenario is “exactly what happened during the subprime crisis, when millions of homeowners were underwater on their mortgages and defaulted,” said McCoy, a former mortgage regulator at the Consumer Financial Protection Bureau (CFPB). “It happened before and it could happen again.”
The housing bubble that burst around 2006 was fueled in part by an explosion of lending to subprime borrowers. In the years leading up to the bubble, lenders created new products like adjustable-rate mortgages and no-down-payment loans that ended up exploding when home prices finally plummeted.
It is true that the real estate market is on fire at the moment. Home prices are at record levels and demand is so strong that some homes are being sold above asking price after cash bidding wars.
Still, another potential problem is that homeowners could be stuck with high-interest mortgage rates if the Federal Reserve begins cutting interest rates.
This is because, to refinance at a lower rate, the homeowner would need to pay off the second mortgage in full. And they may not have enough money to do that.
They may also be locked into higher rates because lenders won’t allow the borrower to refinance if they haven’t built up enough equity in the home.
There are other options for zero-value mortgages. For example, Bank of America launched a zero down payment mortgage program in 2022 for first-time homebuyers in some Black and Hispanic neighborhoods.
As Bank rate notes, there are also zero-rate home loans guaranteed by the U.S. Department of Agriculture (USDA) in rural areas, as well as loans for veterans and surviving spouses guaranteed by the U.S. Department of Veterans Affairs (VA).
Anneliese Lederer, senior policy advisor at the Center for Responsible Lending, said it’s crucial that homeowners considering the UWM loan program are informed about the terms and conditions.
“Using fun phrases like ‘no entry’ sounds exciting and great. But you need to read the fine print,” Lederer said. “This could be a fantastic product to allow people who can afford their mortgage payments but don’t have a down payment to access home ownership. But the question is: how do you pay off the second mortgage? What is the plan? There is no plan at the moment.”
Dennis Kelleher, CEO of Better Markets, a nonprofit that advocates for stricter financial regulation, told CNN he worries a mortgage product like this could hurt some borrowers if the housing market stumbles.
“These mortgages will be ticking time bombs – just like subprime mortgages – unless home prices continue to rise substantially,” Kelleher said. “This has the potential to turn the American dream of homeownership almost immediately into a nightmare.”
Kelleher noted that although home prices are rising sharply now, there is no guarantee that this will continue.
Existing home prices have increased another 6% last month year over year to $407,600 — the highest average price ever recorded in April.
“We don’t know if we’re in a bubble that’s going to burst or if the trend lines are going to rise,” Kelleher said. “But promoting 100% mortgage products to low-income people when housing prices are at historic highs should make everyone very concerned.”
Jonathan Adams, an assistant professor at Saint Joseph’s University who teaches real estate finance, said UWM’s loan program has “all the features that made subprime bad.”
UWM dismissed those concerns, noting that borrowers must still follow strict underwriting guidelines.
“The people making these claims are unaware of the current state of the industry,” said Elezaj, the UWM executive. “In the current environment, UWM is responsible for loan underwriting, which gives us confidence that these are high-quality loans.”
“That’s a big positive. It’s helping consumers and it’s a big win for everyone,” said Elezaj. “Think about all the people who are renting and would love to buy a house but face the hurdle of getting $10,000 or $15,000 for a down payment. This eliminates that.”
It is also important to note that some Experts say lending standards have improved significantly since the 2008 financial crisis.
The days of NINJA Loans (no income, no job, no assets) and adjustable rate mortgages have all but disappeared.
“We’re not going back to 2006 here,” said Greg McBride, chief financial analyst at Bankrate. “Credit standards are light years away from pre-crisis standards, when there were often no standards at all.”
However, former Wall Street analyst Adams warned that someone who can’t make a down payment and earns less than 80% of the median income (those who qualify for this loan program) will likely suffer more in an economy when home prices rise. are falling.
“One of the lessons of the subprime crisis,” Adams said, “was that you’re not doing borrowers any favors by making it too easy to borrow.”