Bill Zielinski of the Mortgaged Future blog worries a new Wells Fargo home-buying program could be “sowing the seeds for the next major crop of foreclosures.”
The bank announced a nationwide down-payment-assistance program this week, aimed at helping low- to moderate-income earners buy a home with less money paid up front. An honorable goal, right?
Zielinski doesn’t think so. He writes that buyers who pay zero-down are far more likely to default on their loans, and that Wells Fargo is practicing “financial lunacy” to approve mortgages that immediately put homeowners at a higher risk of foreclosure.
What do you think? Should zero-down loans be a thing of the past? Or is there a responsible way to lower the upfront costs of buying a home?
1) It appears Wells Fargo is encouraging people to take advantage of existing down payment assistance programs. Its not clear that all, or any, of those programs provide the entire down payment.
2) Given that a majority of American households are under water on their mortgage, i.e. have negative equity, it would be surprising if that was not true of people going into foreclosure.
3) Wells Fargo makes money by making loans. Right now the people who can afford to buy a home are mostly first time buyers (as noted in #2, the rest of us are stuck under water). Its not surprising that they are looking at programs that target that group. Wells Fargo simply needs to factor whatever additional risk of default there is into the cost of the loans.
4) The real question is whether we have any regulations in place to prevent Wells Fargo from reselling risky loans as highly rated, safe, securities. It was that securitization of bad loans that drove the housing bubble and created the economic collapse.
5) Zielinsky appears to be playing statistical games to support his foregone conclusions.
Zielinsky does make a wonderful point. That is the homeowner needs to have some skin in the game. 20% down, debt to income ratio that allows the homeowner to credibly make the mortgage payments.
Most of the defaults come from homeowners that have no down payment. With absolutely nothing to lose. Can you say jingle mail?
No one likes to face ugly realities like financially ailing borrowers who are so strapped that nothing can save them. Not the lenders, not the Wall Street firms that sell the securities, not even the holders. But experienced investors know that a reliance on fantasy will only prolong the pain that is racking the huge and important mortgage market.
A zero down loan should not be that big of a problem, I’ve done it as long as it is rolled into the mortgag pmt on a FIXED RATE!. It is the balloon pmt of the ARM mortgages wihich screwed so many (including us) No money down on a fixed mortgage should be a help to first time home buyers.