Zero down mortgages are making a comeback | CNN Business

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Many Americans would like to buy a home, but they don’t have tens of thousands of dollars to cover a down payment.

That massive hurdle is being removed by a new zero-percent-down mortgage program launched two weeks ago by one of the nation’s largest mortgage lenders.

However, the new program, offered by United Wholesale Mortgage, is making some experts nervous about how these loans could hurt homeowners, especially if home prices stop going to the moon. And for some, it brings back bad memories of the subprime mortgage meltdown that fueled the 2008 financial crisis.

UWM, led by Mat Ishbia, the billionaire owner of the Phoenix Suns NBA team, said homebuyers who qualify will not need to pay a down payment.

Instead, the program will allow buyers to pay for 97% of the home’s value with a first mortgage and then offer the remaining 3% (up to $15,000) in the form of a second mortgage.

This second mortgage will not accrue interest, but will have to be paid in full as a lump sum payment when the home is sold, the mortgage is paid off, or if the owner refinances.

The question was big

These mortgages are only open to first-time home buyers and those making no more than 80% of the area median income.

The initial demand has been great. We already have several thousand loans delivered, Alex Elezaj, UWMs chief strategy officer, 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 realtors 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.

The central risk is that because they provide no down payment, homeowners will start out with no equity.

This means they would find themselves immediately underwater (due to more than the home is worth) if the hot housing market suddenly cools and home values ​​drop.

This can be a problem if the homeowner needs to sell quickly, perhaps because they lose their job, face financial difficulties or need to relocate.

Suddenly, they would be ready to pay off that second mortgage. And because they’re underwater, selling the house won’t generate enough cash to pay off the debt.

If the homeowner lacks the money to make up the difference, then he or she will be in default of a second mortgage and at risk of foreclosure and damaged credit, said Patricia McCoy, a professor at Boston College Law School.

That scenario is exactly what happened during the subprime crisis, when millions of homeowners were underwater on their mortgages and went into default, said McCoy, a former mortgage regulator at the Consumer Financial Protection Bureau (CFPB). It has happened before and it can happen again.

The housing bubble that popped around 2006 was fueled in part by an explosion of lending to subprime borrowers. In the years leading up to the bubble, lenders came up with new products like adjustable rate mortgages and no down payment loans that ended up blowing up when home prices eventually fell.

To be sure, right now the housing market is on fire. Home prices are at record highs and demand is so strong that some homes are selling above asking price after cash bidding wars.

However, another potential issue is that homeowners may find themselves locked into high interest mortgage rates if The Federal Reserve begins to cut interest rates.

That’s because in order to refinance at a lower rate, the homeowner would have to pay off that second mortgage in full. And they may not have enough money to do so.

They can also get stuck with higher rates because lenders won’t let the borrower refinance if they haven’t built up enough equity in the home.

There are other options for zero down 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 Bankratenotes, there are also zero down home loans supported by the US Department of Agriculture (USDA) in rural areas, as well as loans for veterans and surviving spouses guaranteed by the US Department of Veterans Affairs (VA) ).

Anneliese Lederer, senior policy advisor at the Center for Responsible Lending, said it’s critical that homeowners considering the UWM loan program educate themselves about the terms and conditions.

Using entertainment lines as free sounds exciting and wonderful. But you have to read the fine print, Lederer said. This can be a fantastic product to allow people who can afford the mortgage payment but don’t have a down payment to get into home ownership. But the question is: How do you pay off that second mortgage? What is the plan? At the moment there are no plans.

Dennis Kelleher, CEO of Better Markets, a nonprofit that advocates for tougher financial regulation, told CNN he worries a mortgage product like this will hurt some borrowers if the housing market falters.

These mortgages will be ticking time bombs just like subprime mortgages unless home prices continue to rise sharply, Kelleher said. This has the potential to turn the American dream of home ownership into a nightmare almost immediately.

Kelleher noted that although home prices are rising sharply now, there’s no guarantee that will continue.

Existing home prices rose another 6% last month year-over-year to $407,600, the highest average price on record in April.

“We don’t know if we’re in a bubble that’s going to burst or if the trend lines are going up,” Kelleher said. But pushing 100% mortgage products to low-income people when house prices are at historic highs should worry everyone.

Jonathan Adams, an assistant professor at Saint Joseph’s University who teaches real estate finance, said the UWM loan program has all the features that made subprime bad.

UWM disputed those concerns, noting that borrowers must still go through strict underwriting guidelines.

People making these claims are uneducated about the current state of the industry, said Elezaj, the UWM executive. In today’s environment, UWM is responsible for loan underwriting, which gives us confidence that these are high quality loans.

This is a big positive. It helps consumers and is a big win across the board, Elezaj said. Think about all the people who are renting and would like to buy a home, but they face this hurdle of coming up with $10,000 or $15,000 for a down payment. This eliminates it.

It is also worth noting 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 are largely over.

We wouldn’t be back here in 2006, said Greg McBride, chief financial analyst at Bankrate. Lending standards are light years removed from pre-crisis when there were often no standards at all.

However, Adams, a former Wall Street analyst, warned that someone who can’t make a down payment and makes less than 80% of median income (those who qualify for this loan program) is likely to suffer the most in an economy when house prices 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.