Zero mortgages are making a comeback

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

This huge barrier is removed by A The new zero percent mortgage program It was launched two weeks ago by one of the country’s largest mortgage lenders.

However, the new program, offered by United Wholesale Mortgage, has some experts concerned about how these loans could backfire on homeowners — especially if home prices stop rising. For some, it brings back bad memories Mortgage collapse Which sparked the financial crisis in 2008.

UWM, led by Matt Ishbia, the billionaire owner of the Phoenix Suns NBA team, said qualifying homebuyers will not need to make a down payment.

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

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

“The demand was huge.”

These mortgages are only open to first-time homebuyers and those whose income is no more than 80% of the area median income.

“The initial demand has been huge. We already have a few thousand loans made,” Alex Elezaj, UWM’s chief strategy officer, told CNN.

UWM said no other wholesale lender or non-bank mortgage company offers such a program nationally. (UWM is a wholesale lending company that connects homebuyers and landlords with mortgage brokers through its Mortgage Matchup platform. Earlier this month, Mortgage Matchup was renamed Mortgage Matchup Our first ever mortgage partner From the NBA and WNBA.)

However, some worry that this type of mortgage may cause problems for future homeowners.

The central risk is that because they don’t make any down payment upfront, homeowners will start out with no equity.

This means they will find themselves immediately underwater (owing more than the home is worth) if the hot housing market suddenly cools off and home values ​​decline.

This can be a problem if the homeowner needs to sell quickly, perhaps because they lost their job, are facing financial hardship or need to move.

Suddenly, they were on the hook for their second mortgage. Because it is underwater, selling the home will not generate enough cash to pay off the debt.

“If a homeowner lacks the cash to make up the difference, they will be in default on their second mortgage and at risk for 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 under on their mortgages and defaulted,” said McCoy, a former mortgage regulator with the Consumer Financial Protection Bureau (CFPB). “It has happened before and it could happen again.”

The housing bubble that popped in 2006 was fueled in part by an explosion in 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, which ended up exploding when home prices eventually collapsed.

The housing market right now is definitely on fire. Home prices are at record levels and demand is so strong that some homes are selling Higher than asking price after cash bidding wars.

However, another potential problem is that homeowners may find themselves locked into higher mortgage interest rates if this happens The Federal Reserve begins cutting interest rates.

This is because in order to refinance at a lower rate, the homeowner will need to pay off the second mortgage in full. They may not have enough money to do so.

They can also be stuck with higher rates because lenders won’t let the borrower refinance if they don’t have enough equity in the home.

There are other options for zero-sum mortgages. For example, Bank of America launched Mortgage program with no down payment in 2022 for first-time homebuyers in some black and Hispanic neighborhoods.

like Pancreatic He notes that there are also zero-interest home loans backed 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 important for homeowners considering the UWM loan program to be familiar with the terms and conditions.

“Using fun lines like ‘no down payment’ sounds exciting and cool. But you have to read the fine print,” Lederer said. “This could be a great product to allow people who can afford a mortgage but don’t have a down payment to gain homeownership.” . But the question is: How can you pay off that second mortgage? What’s the plan? At the moment there is no plan.”

Dennis Kelleher, CEO of Better Markets, a nonprofit that advocates for stricter financial regulation, told CNN he was concerned that a mortgage product like this would hurt some borrowers if the housing market faltered.

“These mortgages will be ticking time bombs — just like subprime mortgages — unless home prices continue to rise very dramatically,” Kelleher said. “This has the potential to almost instantly turn the American dream of homeownership into a nightmare.”

Although home prices are rising sharply now, there is no guarantee that will continue, Kelleher noted.

Existing home prices jumped Another 6% last month year over year to $407,600 – Highest April average price ever.

“We don’t know if we are in a bubble that will burst or if the trend lines will increase,” Kelleher said. “But pushing 100% mortgage products onto low-income people when housing prices are at historically high levels should worry everyone very much.”

UWM’s loan program has “all the features that made mortgages bad,” said Jonathan Adams, an assistant professor at St. Joseph’s University who teaches mortgage finance.

UWM responded to these concerns, noting that borrowers must still follow strict underwriting guidelines.

“The people making these claims are not aware of the current state of the industry,” said Elizai, the University of Wisconsin executive director. “In today’s environment, UWM is responsible for the loan underwriting, which gives us confidence that these loans are high quality.”

“This is a big positive. It helps consumers and it’s a big win across the board,” Elezaj said. “Think about all the people who are renting and want to buy a home, but they have this hurdle of having a $10,000 or $15,000 down payment. This eliminates that.”

It is also worth noting that some Experts say lending standards have improved significantly since the 2008 financial crisis.

days Ninja Loans (No income, no job, no assets) and adjustable rate mortgages have largely disappeared.

“We’re not going back to 2006 here,” said Greg McBride, chief financial analyst at Bankrate. “Lending standards are a far cry from the pre-crisis years 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 the median income (those who qualify for this loan program) will likely struggle more in the economy when prices rise. Homes. They fall.

“One of the lessons of the subprime crisis was that you’re not doing borrowers any favors by facilitating borrowing,” Adams said.