After the financial crisis of 2008 (nicely summarized by this UK Parliament study RP09-34 (2)), the financial system vowed to return to safe underwriting standards such as 20 percent down payments on mortgages. The US financial system returned to high down payments for a while, but …. the itch is back to make zero down payments loans again.
First, of course, you have the FHA which stuck by it’s low down payment guns (3.5 percent).
Second, you have mortgage giants Fannie Mae and Freddie Mac pushing the enveloped with 3 percent down payment loans.
Third, you have this story from Housing Wire, “BBVA Compass launches zero-percent down mortgage program.” (Banco Bilbao Vizcaya Argentaria, a Spanish bank).
In recent months, the Obama administration has taken several steps to expand the credit box and make it easier for borrowers, especially first-time homebuyers, to buy a home. To that end, in October, Fannie Mae and Freddie Mac announced 97% loan-to-value offerings.
For some borrowers, saving up 3% for a down payment is still a hurdle they can’t quite clear. However, a new program from BBVA Compass (BBVA) will allow borrowers to put down even less for a down payment, in fact.
BBVA Compass announced the launch of a new program, called Home Ownership Made Easier or HOME for short, designed to help low- and moderate-income borrowers become homeowners by helping to overcome one of the “most significant barriers” to homeownership, the down payment.
In the HOME program, qualifying borrowers will be eligible to finance 100% of the home’s value. In addition to offering 100% LTV loans, BBVA will also contribute up to $4,500 toward “certain closing costs” associated with obtaining a home loan.
What could go wrong? 100 percent LTV lending with lenders paying $4,500 of closing costs?
Fourth, you have the American Enterprise Institute (AEI) repackaging the 15 year mortgage with a maximum LTV (loan-to-value ratio) of 100 percent that allows for repurposing the 5 percent in down payment funds for a 1.25 percent permanent rate buydown. The 15 year mortgage rate already available is 3.03 percent compared to a 3.85 percent 30 year fixed, so the AEI’s plan is to buy down the rate even further.
I am a big fan of the traditional 15 year mortgage because of it’s lower interest rate.
But the 15 year mortgage also requires a larger monthly payment to amortize the mortgage over 15 years. This will raise the mortgage payment considerably and borrower’s may not be able to meet the debt-to-income (DTI) requirement, even at the lower interest rate AFTER the buydown. AND it is a 100 percent LTV mortgage! How many low income households can afford 30 percent higher monthly payments?
In order to make the monthly payment on the 15 year mortgage equal that of a 30 year mortgage, the interest rate would have to be bought down to 0.09%.
This is hardly a mortgage product for low income households. We already have a product for low-income households — it’s called RENTING.
So there you go, sports fans. The financial system is returning to 100 percent (or thereabouts) LTV lending.
And if the system crashes again, we can sing along with another Elton John song, “Saturday Night’s Alright For Fighting!”