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0% Down, 100% Chance of Trouble

As originally posted by Rick Sharga, ECP of, on

We've seen this movie before, and if I recall correctly, it didn't end terribly well.

In fact, we're still living through the seemingly-endless backlog of delinquent loans and distressed properties that the massive housing boom and bust cycle left us with back in 2008. A cycle that was fueled by free-flowing capital, and built bad loan by bad loan by bad loan.

Imagine my surprise to read today about a new loan product that requires 0% down; has no private mortgage insurance requirement; provides cash from the lender for up to $4,500 of the closing costs, and allows gifts or seller funding for the rest of the closing costs; is aimed at borrowers making less than 80% of the median income in the market where they're buying a home; and available only for properties located in a low-to-moderate income census track.

Details from HousingWire here:

So, zero down payment loans to low-income borrowers with basically no cash reserves, on properties least likely to increase appreciably in value, and probably most likely in need of repairs.

What could possibly go wrong with this set-up?

I like the idea of helping people buy more homes, more easily, and more affordably. And I'd like to think that this lender is trying to do just that with its new program.

But having lived through the last cycle of zero-down loans to marginally-qualified borrowers, I know that what really happened was that people who just weren't financially ready for home ownership were put into homes they really couldn't afford, with predictably unpleasant results. In many cases, the resultant foreclosure - along with the financial meltdown that many of these borrowers experienced - has made their opportunity for home ownership - even in the future - extraordinarily unlikely.

We shouldn't be putting borrowers in a position of being one water heater leak away from a foreclosure. Not again.

Let's hope that history doesn't repeat itself here. This is one sequel I'd really rather not see.