The Return of No-Money Down

Can late night commercials urging you to find out how YOU TOO can acquire a huge swimming pool filled with third-tier catalogue models be far behind?

I've written about this program before, which was supposed to provide $1,000 down mortgages in four states. But according to CNBC, at least one couple has managed to purchase a home with collateral of . . . 67 cents.

It's called Affordable Advantage, and it allows first-time home buyers in four states (Massachusetts, Minnesota, Idaho and Wisconsin) to get essentially no-money-down loans that are then sold to Fannie Mae. It requires $1000.00 down, but the couple profiled in the piece received a grant, and ended up paying just 67 cents for a $115,000 home.

The Fannie Mae program requires a minimum credit score of 680 (720 in Massachusetts) and the buyer must live in the home. All loans are 30-year fixed. The arguments for the program are persuasive: It wasn't the no-money-down loans themselves that fueled the housing crash, it was the poor underwriting. These loans are very strictly underwritten. Adjustable rate loans were the primary drivers of default, while these loans are fixed.

The government is trying to stem the tide of mortgage walkaways by creating programs that force lenders to give borrowers back home equity -- and despite the small credit hit to the borrower, that's free equity.

CNBC's John Carney adds "Diana is being too kind to the government here. The arguments for the program are not really persuasive. Adjustable rate loans are not the primary drivers of defaults--the primary driver is the combination of borrowers who have negative equity and expect that the value of their home will not appreciate soon. This means that no money down home loans are particularly dangerous--regardless of how vigorously lenders counsel homeowners or screen for credit scores."

I'm not sure I quite agree with Carney's assessment.  It's absolutely true that having negative equity is a better predictor of default than things like unemployment.  But while many people have interpreted this to mean that negative equity makes you likely to strategically default, it's not clear to me that that is actually very widespread.  It's just as plausible--perhaps more so--that having negative equity makes you much more vulnerable to negative income shocks, because you can't sell the house or refinance when something bad happens.

But either way, having negative equity is very, very dangerous.  And that's what a no-money-down borrower has in this market, because prices aren't rising much, and they need to find thousands of dollars to pay broker commissions and closing costs if they want to sell.

What truly boggles the mind is that the government still thinks that it's somehow a good idea to help push people with basically no savings into homeownership.  Do they want to make sure that a whole new class of financially marginal people can enjoy the benefits of foreclosure?