Last week Bank of America announced that they are rolling out a loan program for borrowers in several markets that will require no down payment. On many levels, it’s a great start for those individuals that will be helped by that program. They will be able to buy a home when they otherwise would not have. But the question I have is more general for the mortgage & real estate industries and that is “is now the time, with high prices and higher interest rates to get folks into a home with no equity?”
In the almost 30 years I have been in the mortgage business, history never directly repeats itself, but it does always seem to rhyme. The thing that happens like clockwork when refinance markets like the one we had during the pandemic end is that the industry finds itself looking to drive volume. We have gotten used to a certain amount of loans every month and have the required processors, underwriters, closers and managers to close those loans. Companies put forward initiatives/programs that help them stay busy. This also helps us not have to lay people off.
These loan programs always seem to have one thing in common, they get people into housing that would have been unable to get a mortgage just a few short months ago. Usually they do this in one of two ways. First, they lower the down payment requirement for securing a mortgage. This new program does that. Second is they lower the monthly payment. Using a buydown, Adjustable Rate Mortgage (ARM) and before the crash using the “pick a payment” and interest only loans. All of these have the impact of expanding the pool of available home buyers and help lenders keep volumes up.
My concern is the same as it has been when this has happened in the past. Are the most financially vulnerable borrowers going to use this program and if the market turns worse or against them, be the ones left holding the bag. It’s hard to “sell and move on” if you have a job change, divorce or illness and cannot make payments in a year or two when you have no equity to cover the transaction costs of exiting. A greater percentage of these loans could end up in foreclosure. It’s a reality but also a cost of doing business for the expansion of the borrower pool, but the last borrowers in are usually the ones holding the bag if the music stops.
Generally though, a reduction in required down payment, like this program, is far better for the market than the tools and programs that reduce monthly payments. Historically, most monthly payment reduction programs have the unintended consequence of allowing prices to continue to rise. This is what happened in 2005-2007 and home values escalated to unsustainable levels. People more often than not, buy monthly payment, not the net price of a house. The unintended consequence of payment reduction is higher real estate prices.
Lower down payment is more like refusing to wind down a party at midnight and instead opening another bottle of wine. It may be OK at the moment, but you might not feel that way come morning.
