PONTIAC, Mich.–A new zero-percent down mortgage program has been launched by one of the nation’s largest mortgage lenders, and some analysts are expressing worries about how the loans could eventually hurt borrowers.
The new loan, available to first-time buyers and those making no more than 80% of the area’s median income, is being offered by United Wholesale Mortgage, which said homebuyers who qualify won’t need to put down a down payment upfront. Instead, the program will allow buyers to pay for 97% of the home’s value with a first mortgage and then provide the remaining 3% (up to $15,000) in the form of a second mortgage.
Under that program, the second mortgage won’t accrue interest, but it will need to be paid back — in full as a balloon payment — when the home is sold, the mortgage is paid off or if the owner refinances.
‘Huge Demand’
“The initial demand has been huge. We already have a couple of thousands of loans submitted,” Alex Elezaj, UWM’s chief strategy officer, told CNN.
But mortgage analysts have concerns, primarily over the risk presented by borrowers, because they put down no down payment up front, meaning that they will be starting with no equity.
“That means they’d find themselves instantly underwater if the red-hot housing market suddenly cools and home values go down,” CNN reported. “That could be a problem if the homeowner needs to sell quickly, perhaps because they lose their job, face financial distress or need to relocate.”
The report further states that those borrowers would suddenly be on the hook to pay back that second mortgage, and because they’re underwater, the home sale won’t generate enough cash to retire the debt, CNN added.
Echoes of Subprime Crisis
That scenario is “exactly what happened during the subprime crisis, when millions of homeowners were underwater on their mortgage and went into default,” Patricia McCoy, a professor at Boston College Law School and a former mortgage regulator at the Consumer Financial Protection Bureau (CFPB), told CNN. “It happened before and it could happen again.”
How to Sign Up For the Best Daily News Email in Credit Unions? (It’s Free!)
Every workday CUToday.info delivers the most comprehensive, freshest daily newsletter with the day’s news headlines, including links to the related articles. The Fresh Today newsletter is the most timely, relevant and widely-read source of news and information in the CU community. And it’s free!
If you haven’t yet signed up for the new email solution on which CUToday.info has partnered with ResponseGenius, you can do so here. Signing up requires less than one minute of your time—and it’s free!
Please note that after signing up you may need to go to your Spam/Junk folder and mark the morning headlines email as safe. CUToday.info does not provide its list of readers and emails to outside parties,
And did we mention it’s free?