A shady financial tool from the housing-bubble era is making a comeback

NEW YORK — America’s gummed-up housing market is a $45 trillion mess — a big old knot of economic forces smashing into a century’s worth of cultural conditioning about the value of homeownership.

There are some obvious, urgent needs: We need more housing, full stop. And that housing needs to be affordable. And we should probably stop letting Wall Street firms become landlords for the sole purpose of extracting capital from renters who could otherwise build equity.

Point is, policymakers aren’t running out of puzzles to solve when it comes to housing. Perhaps the last thing the market needs is another shady financial product that pushes low-income Americans into homes they can’t afford, under terms that could bankrupt them.

And yet, here we are. The zero-down mortgage is making a comeback, my colleague Matt Egan reports.

Two weeks ago, one of the nation’s largest mortgage lenders rolled out a “new” program (I put new in quotation marks because, well, we’ve seen this movie before) that allow first-time homebuyers to secure their purchase with no money down.

Zero down. Lots on the line

Let’s briefly get into how it works, and then we can talk about why it’s a huge red flag for anyone with passing understanding of the 2008 financial crisis.

So, you want to buy a home but you’re not sitting on enough savings for a downpayment. (Super common, totally fine, we’ve all been there.)

Under the deal being peddled by United Wholesale Mortgage, you can bypass that initial cash payment. (Sounds great, right? Read on.)

Instead, you borrow 3% of the home’s value (up to $15,000) as an interest-free loan, and pay for 97% of the home’s value with a standard mortgage.

(Interest-free! Where do I sign up?)

Here’s the catch: That $15,000 won’t accrue interest, but it will need to be paid back — in full, all at once — when you either sell the home, pay off the mortgage or refinance.

That will work out great, assuming nothing bad happens to you or the economy and the value of your home keeps going up. And honestly, when has the value of the housing market ever gone anywhere but up up up up?

Ohhhh right.

So let’s just highlight some of the ways this $15,000 sword of Damocles could wind up stabbing you in the back.

• The housing market, as we all remember from “The Big Short,” does not always go up. And because you didn’t put money down, you’d be instantly underwater — owing more than the home is worth — if the market sours.
• You don’t want to be underwater when tragedy strikes. Losing a job or falling into financial distress might prompt you to try to sell your house, which would put you on the hook to pay back the $15,000. But if the house isn’t worth what you owe, you’ll be in default. That scenario is “exactly what happened during the subprime crisis,” said Patricia McCoy, a professor at Boston College Law School. “It happened before and it could happen again.”
• Even under the rosiest economic scenario, you still have to pony up $15,000 at some point. And as any homeowner can attest, your house is going to be a constant financial drain from the moment you’re handed the keys. You are going to have projects. Lots and lots of projects. And they won’t always be the fun DIY bathroom renos you see on TikTok. Most of them will be the “holy crap we have to replace the entire roof before the winter” kinda projects. That’s going to slow your cash accumulation significantly.

UWM is pushing back on all those concerns, noting that borrowers must still go through strict underwriting guidelines, and lending standards have gone up significantly since the financial crisis.
“People who make these claims are uneducated about the current state of the industry,” Alex Elezaj, UWM’s chief strategy officer, told CNN. “In today’s environment, UWM is responsible for underwriting the loan, which gives us confidence that these are high quality loans.”

And sure, we’re not exactly doling out NINJA loans — no income, no job or assets — anymore.

But if there’s a morsel of wisdom mortgage companies should have tattooed on their foreheads it’s that lower-income people with no savings are likely to suffer more in a bad economy.

“One of the lessons of the subprime crisis,” said Jonathan Adams, an assistant professor at Saint Joseph’s University, “was that you are not doing any favors to borrowers by making it too easy to borrow.”

Creative homebuying

The resurgence of the zero-down loan underscores how sticky the housing market of 2024 has become. With low inventory and mortgage rates around 7%, sellers are unmotivated to move, and buyers lack choice, forcing some to get creative.

One way for motivated buyers to hunt for a lower mortgage rate is buy someone else’s. “Assumable” mortgages are loans that allow a homebuyer to take over a seller’s existing loan — its (ideally) lower interest rate, my colleague Samantha Delouya reports.

The way it works: A buyer pays out in cash the amount that the seller has in equity, while taking on the remaining mortgage balance.

It’s not a perfect solution for everyone, of course — that equity could be a hefty amount that the buyer may not have on hand, and only about a quarter of all mortgages is the US are assumable. But it beats waiting on the magic combination of macroeconomic forces to finally bring rates on new mortgages down.

It worked for Ellen Harper, a software analyst in her mid-50s, who closed on a Fairburn, Georgia, home in April, when the average 30-year rate was just over 7%. Harper’s rate? 2.49%. That’s saving her thousands of dollars in monthly payments, Samantha writes.

“I just decided I wanted to see how low I could pay on the interest rate,” Harper says. “I went into it looking for the best deal I could get, and I think I did pretty good.”