credit, zero down can put
you in a house, but know the risks
when you thought it couldn't get any easier to buy a house, the
mortgage industry polishes up its silver platter again.
For the first time, a large number of lenders
have begun offering 100 percent home loans at near-market rates
to conventional borrowers. These no-down-payment deals, which are
targeted toward people with good credit but not a lot of cash, are
the industry's latest attempt at keeping business humming in the
face of rising interest rates.
face significant risks
Yet, just like the 97 percent mortgages that preceded them,
these loans expose borrowers to significant risks. Because they
have no equity, consumers could end up owing more than their homes
are worth with even the slightest downturn in property values. Though
the loans carry only a slight bump in the interest rate, they come
with significantly greater private mortgage insurance, so the monthly
payments will be tougher to make. As a result, experts caution that
most consumers who pursue 100 percent mortgages will have little
or no margin for error should even minor problems arise with the
economy or their own finances.
"The reason underwriting guidelines ease up
periodically is because everyone becomes generally confident and
comfortable," says James W. Kemish, president of Power
Mortgage Corp. in Delray Beach, Fla. And right now, "the stock
market is doing well. The economy is doing well. Everyone is feeling
good and people are paying their bills.
"But, of course, there's a little warning in
all of this," he adds. "The business cycle is not dead, and be it
a year from now or 10 years from now, when there's a little bit
of a change in the real estate market, you could see a lot of lenders
singing the blues."
down an outdated notion
By now, the notion that somebody should have to put 20 percent
down for a home seems as outdated as bathtub gin and the Model T.
During the past two decades or so, borrowers have slowly but surely
been allowed to pay less at closing, and the pace of that decline
has accelerated in the late 1990s.
At the same time, penalties and costs associated
with not paying as much up front have declined. This is in part
because the two agencies that buy many of the loans lenders make,
Mae and Freddie
Mac, have shown a willingness during the past couple of years
to purchase mortgages with less money down than ever before. Their
entry into a market tends to drive down pricing and eliminate any
interest rate premium that lenders would otherwise charge to compensate
for their increased risk. In the spring of 1998, for instance, the
agencies began purchasing 97 percent loan-to-value loans.
"We've been buying lower and lower down payment
mortgages, and we will buy 3 percent down mortgages at this time,"
Fannie Mae spokesman Clyde Ensslin points out.
downs available for the average person
Still, most 100 percent financing programs that were available
before last year were aimed at specific areas or customer groups.
A local bank might have offered them to low-income borrowers or
people willing to buy in neighborhoods targeted for revitalization,
for example, as part of a public-private partnership. But conventional
customers, by and large, didn't have the same choice.
In 1999, though, that's no longer the case.
"Now there are many zero downs for just the
average person," says Steven Parrish, owner of the Seattle mortgage
& Associates. "Fifty percent of the lenders probably have
some type of zero down product that will accommodate just about
The big push came from a private mortgage insurance
company called United
Guaranty, a subsidiary of American
International Group Inc. Last year, it created a program labeled
Borrower Advantage that allows consumers with minimum credit scores
of 700 to finance 100 percent of a home's purchase price and, in
some cases, part of the closing costs, up to a maximum loan-to-value
ratio of 103 percent. The loan didn't really catch on until this
spring, however, when companies that buy loans from mortgage brokers
and hold them in their portfolios began pitching it aggressively.
"We felt we could insure the loan at 100 percent
or more, provided the borrowers had good credit," says Terry Howard,
director of product development at Greensboro, N.C.-based United
Guaranty. "We felt like this would be a good product to offer to
the market because you see a lot of people out there who are just
getting started or are up-and-coming professionals who have the
money to make the monthly payments but just don't have the down
the loans work
In many respects, 100 percent loans work just like regular mortgages.
Borrowers can choose a number of different products, from 3/1 adjustable
rate mortgages to 15- and 30-year fixed-rate ones. There are no
additional closing costs and they are available in loan amounts
up to $240,000. Some programs have even higher thresholds.
At the same time, most cost more than conventional
loans. Borrowers should expect to receive a rate that's at least
one-fourth of a percentage point to one-half of a percentage point
higher than the rate a conventional loan with the same term would
feature. Because private mortgage insurance companies charge more
money the less a borrower puts down, 100 percent loans cost much
more per month than other mortgages, too. A $100,000 loan might
have an annual PMI premium of $970, or about $81 a month, according
Borrowers who get this type of mortgage could
run into other problems, too, because they have no cushion against
hard times. If a manufacturing plant were to close in the neighborhood
or property values were to decline, somebody could end up owing
more than the house is worth.
Walking away and leaving house keys in the mailbox
-- the way some Texas homeowners did during the 1980s oil-driven
market collapse -- might get rid of the mortgage burden. But it
would also leave a foreclosure stain on the borrower's credit report.
Even if property values only slipped rather than collapsed, someone
selling such a home could still end up having to pay money at closing
to settle the mortgage balance. That's because payments during the
early years of a home loan go mostly toward paying off interest
rather than reducing principal.
"You'd want to make sure that you have good,
stable income and that you feel comfortable with your job, that
it's going to be there for a while," says Sue Huber, senior vice
president at SunTrust
Banks Inc.'s Crestar Mortgage division.
The company plans to roll out its first 100 percent loans sometime
in the next month.
"When you commit to something like that, you
want to make sure you can afford to make those payments because
you don't really have any equity in your home at all."
reality due for stock market
There's another problem with full financing that lenders are
starting to note: Many borrowers ask for 100 percent loans because
they don't want to cash in their stock market portfolios to come
up with a down payment. As long as stocks keep rising, they can
always cash in later and prepay some of their balances under that
strategy. But some think consumers who do so are just sticking their
heads in the sand.
"While the stock market equity changes from
day to day, the debt on their house doesn't," says Kemish, the Florida
mortgage broker. "They're locking themselves into a significant
amount of long-term debt and they're doing it with the hopes that
their market investments never go down.
"A word to the wise would be: 'Nothing, no market
cycle, has lasted forever.' "
For now, experts think 100 percent loans are
here to stay. Though neither Ensslin at Fannie Mae nor Freddie Mac
spokesman Douglas Robinson would say whether the agencies plan to
start buying no-down-payment first mortgages, industry officials
speculate that it's only a matter of time. That would likely fuel
even more growth in a part of the mortgage marketplace that's already
"A lot of the reason this is showing up is that
rates have gone up," says Crestar's Huber. "And, everyone is scrambling
to find something new they can sell out there that's better than
what the other guy has."