You may have heard that the nation’s largest mortgage lender has just introduced a zero-rate mortgage.
If you witnessed the housing market collapse of the early 2000s, you may feel like you’ve seen it before. And not in a particularly good way.
After all, it was toxic home loans that flooded the market then, causing home prices to collapse and short sales and foreclosures to surge.
Does this mean we are on a familiar path, which will likely see a familiar outcome?
Or is it a big deal to do for nothing?
UWM’s new 0% off purchase program
United Wholesale Mortgage (UWM), which works exclusively with mortgage brokers, recently unveiled a new loan program called “0% Down Payment.”
As the name suggests, it allows the home buyer to purchase a property with nothing out of pocket, at least in terms of the down payment.
At first glance, this seems like a bad idea, especially with home prices so high right now. Not to mention mortgage rates either…
But before we get into judging the program, let’s talk about how it works.
It’s essentially a 97% LTV loan, widely available from both Fannie Mae and Freddie Mac, and features a 3% silent second mortgage offered by UWM.
The silent aspect of a second mortgage means that it does not carry any monthly payments, or interest for that matter.
Instead, this lien remains behind the first loan and accrues only if the borrower sells the property, or refinances the first mortgage.
If borrowers so choose, they can make payments on the second mortgage, although there is no obligation to do so.
Most will likely ignore its existence and when the time comes, pay it off by selling or refinancing.
When this happens, it will simply result in a slight decrease in sales revenue, or an increase in the loan amount when they refinance (but consider the amount they pay for the first loan in between).
Who is eligible for this program?
There are two ways to qualify for this new program, one is income-based and the other is for first-time homebuyers.
Those with income equal to or less than 80% of the Area Median Income (AMI) for the address of the property they are purchasing can qualify if they meet Freddie Mac’s house is possible® Guidelines.
They simply need a FICO score of 620+ and their loan-to-value (LTV) ratio must be between 95% and 97%.
So-called “very low-income borrowers” with qualifying income of 50% or less of AMI will receive a $2,500 credit as part of the 3% down payment assistance.
This credit does not need to be repaid and is deducted from the balance of the second mortgage.
The other way to qualify, assuming your income is very high, is to be a first-time home buyer and meet both Freddie Mac Home One® and UWM guidelines.
As a quick reminder, a first-time buyer is someone who has had no interest in homeownership within the three years prior to applying.
Additionally, they must have a FICO score of over 700 and their LTV must be greater than 95%, with a maximum of 97%.
The maximum purchase price is $500,000
Since the 3% credit is limited to $15,000, the maximum purchase price is $500,000.
This will result in a loan amount of $485,000 at 97% LTV with the silent second set at $15,000.
As mentioned earlier, there are no monthly payments on the first mortgage, and there is no interest on the second mortgage either.
It comes with a 360-month loan term, meaning 30 years, and features a high down payment when you sell or refinance.
Simply put, a home buyer with limited funds for a down payment may now be able to purchase a property that they did not previously qualify for.
The million dollar question is does this significantly increase risk, or just increase the volume of home equity loans for UWM?
How risky are zero-day loans?
Now I don’t want to be flippant and say down payments don’t matter. But if the baseline drops by 3%, is 0% much different?
Sure, there is some Skin in the game is 3%, or 3.5% in the case of an FHA loan, but it’s still very little.
It is difficult to say what difference this will make in terms of borrower behaviour. The down payment may provide some risk mitigation.
It may deter a high-risk borrower from making the decision to buy a home versus renting.
But in the end you have to look at the multi-layered risks. In the early 2000s, zero-rate mortgages were all the rage.
However, they are offered together with a declared income guarantee and/or no documentary guarantee.
Additionally, you can purchase an investment property with no down payment, again with limited documentation regarding your income, assets, or employment.
Furthermore, borrowers were often taking out mortgages with adjustable interest rates, or worse, an ARM option that allows for passive amortization of the debt.
Today, these loans need to be fully underwritten, even if they don’t require a down payment. I believe most, if not all, will be 30-year fixed rate mortgages.
This makes me feel a little better about them, even if they lack the financial commitment from the borrower.
And when you look at it in the context of the 3% down loans that are readily available from any lender that offers Fannie Mae or Freddie Mac loans, it doesn’t seem all that different.
If we compare it to the traditional 20% down payment required to purchase a home, this would be a completely different story.
Then you will feel that this program is very new and potentially dangerous.
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