Zero % down mortgages - will they ever learn?

[Walt34]

For those who follow such things regularly this is probably not news.

But I had a bit of a flashback today when I saw a full page advertisement in the local paper for a zero percent down mortgage.

Oh, boy! No skin in the game! Your home equity is an untapped piggy bank! If the house value falls, walk away!

Stuff like this makes me wonder how the human race survives.

 

[RunningBum]

OK, it's not a "Zero % mortgage", it's "Zero down payment". Suggest you fix the title. I was trying to figure out how anyone could give a 0% mortgage unless the closing costs were very high.

 

[Walt34]

Oops. Done.

 

[MissMolly]

How is it an untapped piggy bank? If you put nothing down and have no equity what is there to tap?

 

[ziggy29]

How is it an untapped piggy bank? If you put nothing down and have no equity what is there to tap?

It's an untapped piggy bank that starts empty, but fills as long as [-]the greater fool theory survives[/-] home prices keep rising.

From there, past history suggests the next step will be very generous home equity loans and HELOCs against the appreciated value, even though the owners may have paid only a grand or two down in principal.

So yes, on Day Zero there is nothing to tap. But our history suggests it could be another example of a cycle which is using home equity as an ATM. And a few years later, they still have little or no equity when it comes crashing down. And then they walk away, lather, rinse, repeat.

 

[SumDay]

A house without equity is a rental with debt.

 

[SnowBound]

It's an untapped piggy bank that starts empty, but fills as long as [-]the greater fool theory survives[/-] home prices keep rising.

From there, past history suggests the next step will be very generous home equity loans and HELOCs against the appreciated value, even though the owners may have paid only a grand or two down in principal.

So yes, on Day Zero there is nothing to tap. But our history suggests it could be another example of a cycle which is using home equity as an ATM. And a few years later, they still have little or no equity when it comes crashing down. And then they walk away, lather, rinse, repeat.

Actually: Past history suggests that the next step will be the new house owner can use the (overly inflated) house collateral to purchase another house. Once this is repeated once it can be repeated again to build a (card) house empire.

 

[Red Badger]

Well, not to worry. If the zero's are back, the interest only ARM (for 3-5 years) and the 40 year mortgages should be along promptly. These tools of a sound financial future should bode well - - - as they did just slightly over ten years ago.

We sold homes in 2004 and 2006. Neither buyer had a dime in the game. Both brought 2 checks to closing; one for 80% and one the the remaining 20%. Neither buyer survived the Great Recession as a "homeowner." Not sure of the 2004 buyer circumstances, but the 2006 guy was a walkaway.

Happy days are here again?

 

[CRLLS]

The family that bought our old home in 2005 did so with a 100% loan. They still own it and according to Zillow, today it is worth 85% of what they paid. It is not the zero down mortgages that got us into trouble, it is the loose qualifications that were used to get them IMO. I don't know what the requirements are to qualify for today's zero down mortgages. Hopefully they are higher.

 

[moneymaker]

Non sense. Please tell me the difference between putting money down, $50k, and losing it when the market shifts and you must sell; and not putting anything down, and writing a $50k check to cover the loss when Selling.

Plenty of folks put $0 down and are financially responsible folks. And many folks, that is there only way to own a home.

Maybe I’m missing your point here or have misinterpreted this?

 

[moneymaker]

A house without equity is a rental with debt.

And just because you put money down doesn’t mean you will always have equity.

Delusional.

 

[corn18]

Non sense. Please tell me the difference between putting money down, $50k, and losing it when the market shifts and you must sell; and not putting anything down, and writing a $50k check to cover the loss when Selling.

Plenty of folks put $0 down and are financially responsible folks. And many folks, that is there only way to own a home.

Maybe I’m missing your point here or have misinterpreted this?

I agree. But I would offer that for every responsible person getting a 0% down loan, there are 10 others that shouldn't get a 0% down loan.

 

[njhowie]

Better yet, I remember when I was mortgage shopping 18 years ago (still in the home, mortgage free now), and JPM was pushing an interest only mortgage!

Their logic was quite simple:
1. Interest is deductible
2. Invest the difference
3. Housing always goes up

 

[DFDubb]

Non sense. Please tell me the difference between putting money down, $50k, and losing it when the market shifts and you must sell; and not putting anything down, and writing a $50k check to cover the loss when Selling.

Plenty of folks put $0 down and are financially responsible folks. And many folks, that is there only way to own a home.

Maybe I’m missing your point here or have misinterpreted this?

Surely you jest?

99.9% of people utilizing a 0% down strategy don't have 5k, much less 50k to cover any loss when they sell, or more likely, walk away from their underwater mortgage.

 

[moneymaker]

Surely you jest?

99.9% of people utilizing a 0% down strategy don't have 5k, much less 50k to cover any loss when they sell, or more likely, walk away from their underwater mortgage.

On the contrary, I can argue that 99.9% of people are approved and buy more house than they can afford; therefore, if housing values don’t appreciate, and they have to sell, does it really matter. Also, the 10% or 20% folks put down typically maxes what they have in cash anyway.

I’ve put 20% down and I’ve used 0% in 2 homes. If markets don’t appreciate, both courses lose out. Yeah, the guy that uses 0% either forecloses or loses out on maybe 6% for realtor fees, transaction costs, etc and the guy that puts down 20%, maybe gets back 10% after fees. Either way, you lose.

100% financing is a great option. I mean why would I put cash down on a car when I can get 100% financing for 5 years with a 0% rate.

 

[DFDubb]

100% financing is a great option. I mean why would I put cash down on a car when I can get 100% financing for 5 years with a 0% rate.

Please provide a link to a 0% down 0% rate home mortgage. I need to refinance.

Sorry, but that is an apples and bananas comparison.

 

[moneymaker]

Please provide a link to a 0% down 0% rate home mortgage. I need to refinance.

Sorry, but that is an apples and bananas comparison.

It’s actually not that different.

What is it you guys are arguing though? That the 0% option is what is messing up the housing market because of folks defaulting? If that is your argument though, there is much more than just a 0% option that contributed to it.

 

[DFDubb]

I suspect anyone on this forum knows how to use a 0% down home mortgage responsibly. It's John Q Public, that is already in debt up to his eyeballs, that I don't want having access to that type of credit.

 

[Mdlerth]

How long can you hold your breath underwater?

We sold homes in 2004 and 2006. Neither buyer had a dime in the game. Both brought 2 checks to closing; one for 80% and one the the remaining 20%. Neither buyer survived the Great Recession as a "homeowner." Not sure of the 2004 buyer circumstances, but the 2006 guy was a walkaway.

I wonder how often people panic at being upside down on a mortgage and unilaterally decide to bolt?

We observe this behavior toward stocks all the time: buy high, then panic sell on the dip. Does it happen with houses too?

As long as they make the payments on time, I wouldn't expect the holder of their mortgage to care whether the home's value had dropped, but I might be wrong. Anybody have insight on this?

 

[SnowBound]

I wonder how often people panic at being upside down on a mortgage and unilaterally decide to bolt?

We observe this behavior toward stocks all the time: buy high, then panic sell on the dip. Does it happen with houses too?

As long as they make the payments on time, I wouldn't expect the holder of their mortgage to care whether the home's value had dropped, but I might be wrong. Anybody have insight on this?

Remembering an article in 2010/2011. When people where faced with only being able to make house / car / student loan / credit card payment: Car payments overwhelmingly got paid first. Thinking credit cards where second in line? That had never happened before and caught the mortgage industry completely by surprise. A huge number mortgages where NOT paid on time, probably something that the Industry calculated was statistically impossible!

 

[ChiliPepr]

As people have said... the issue is not with a zero down mortgage, the issue is with underwriting process. People get approved for a zero down loan that shouldn't.

As shown by the number disagreements on all the "Should I pay off my mortgage?" threads, there are a number of people that have enough cash to easily pay off their mortgage. And, if they have enough to pay off their mortgage, it does not matter if the mortgage is 10%, 50% or 100% of the value of their home.

 

[DFDubb]

As shown by the number disagreements on all the "Should I pay off my mortgage?" threads, there are a number of people that have enough cash to easily pay off their mortgage. And, if they have enough to pay off their mortgage, it does not matter if the mortgage is 10%, 50% or 100% of the value of their home.

The people on this website and similar are the 1%. There are very very few Americans out there with the cash reserves to pay off their mortgage. I lived in CA during the meltdown and there were people walking away from their mortgages on every block it seemed. These are people that had been perfectly OK paying what they were paying for years, but the minute that their house was no longer worth what they paid, they up and left. They of course hitched up their RV that they paid for with home equity when they left. Many of these houses sat empty for years being a real eyesore in the community. It was not pretty and IMO, fueled by poor lending practices, beginning with giving 0% down loans to woefully unqualified folks.

 

[SumDay]

I agree. But I would offer that for every responsible person getting a 0% down loan, there are 10 others that shouldn't get a 0% down loan.

And that has been my experience 100% of the time. It was how my parents managed their real estate portfolio. I inherited it all in 2008. It was not pretty.

 

[exnavynuke]

Please provide a link to a 0% down 0% rate home mortgage. I need to refinance.

Sorry, but that is an apples and bananas comparison.

If you had $50k, and a 2.5% mortgage interest rate, would you:
A. Invest the $50k
or
B. Pay down the mortgage?

Personally, I'm investing it. And if I'm not going to put $50k towards the mortgage after I get it, because the rate is low, then it stands to reason that I'd similarly not want to put $50k towards the mortgage just to get it. Thus, if offered a mortgage without PMI that I could put 0% down on for the same rate, I'm putting 0% down every time. Thank you VA loans...

 

[DFDubb]

If you had $50k, and a 2.5% mortgage interest rate, would you:
A. Invest the $50k
or
B. Pay down the mortgage?

Personally, I'm investing it. And if I'm not going to put $50k towards the mortgage after I get it, because the rate is low, then it stands to reason that I'd similarly not want to put $50k towards the mortgage just to get it. Thus, if offered a mortgage without PMI that I could put 0% down on for the same rate, I'm putting 0% down every time. Thank you VA loans...

Of course, but like I've said, I'm not worried about the folks here who are savvy enough to understand the above. I'm worried about the every day dolts driving around in a new car that don't have 2 nickels to rub together until the next payday.

These types of lending practices have very real consequences that everyone seems to have forgotten about.