Today's Mortgage Trid-Bit: Lenders move into no-downpayment territory

Jun 22, 2017  14:35 ET  Scotsman guide - reprint...

Are zero-downpayment loan programs making a comeback? The national lender Movement Mortgage rolled out a mortgage in June that requires borrowers to put nothing down, drawing the attention from a nationally syndicated column and creating much buzz in the industry that zero-down mortgages were back. 

Movement’s program itself was not new, however. 

Several major lenders, starting with Quicken Loans in 2015 and followed by others, are now offering their cash-strapped borrowers a gift in the form of a grant to help with the downpayment. These technically aren't no-down loans like, say, a Veterans Affairs (VA) loan, where 100 percent of the loan can be financed and the borrower has no skin in the game. 

Movement Mortgage will gift the borrower a grant of up to 3 percent on a conventional loan purchased by Fannie Mae, said Adam O'Daniel, Movement’s communications director. The borrower starts with a 3 percent equity stake in the mortgage. 

“It is not a no-downpayment loan,” O’Daniel said. “It is 97 percent financing with a grant, which is similar to other products that have been offered in the marketplace for a long time through housing authorities and state agencies. This allows us to step up in that way.”

Movement’s program is similar to grant-assistance programs that Guild Mortgage, Guaranteed Rate, LoanDepot, among a few others, have rolled out in recent months. The difference is that most of the other lenders will only kick in 2 percent of the downpayment, whereas Movement will finance all of it. 

This is not to say that there is no news here. No-downpayment and very low-downpayment mortgages are making a comeback in the sense that lenders are establishing their own assistance programs, said Rob Chrane, chief executive officer of Downpayment Resource, which maintains a database of all available programs in the U.S. Until just recently, downpayment assistance tended to be the domain of state-finance agencies and nonprofits.

Now lenders are kicking in their own money and taking a lesser cut on the mortgage profit, so the deal can close. Some people in the industry believe more lenders will follow, especially if home prices keep going up. The downpayment and closing costs are considered the highest hurdle for first-time borrowers.

In many mortgage shops, companies have already ramped up their marketing to millennial and first-time buyers. One of the primary tools to help them along is downpayment assistance, said Joe Parsons, a branch manager with Caliber Homes.

“The primary barriers to somebody getting into the housing market for the first time are the need for cash, not only the downpayment, but also the closing costs,” Parsons said.

In California, where home prices have skyrocketed along the coast, it has become fairly common for first-time buyers in high-cost counties to get a second loan through the California Housing Finance Agency to cover the 3.5 percent downpayment on a Federal Housing Administration loan, Parsons said. Parsons added that borrowers can also get a third loan that will cover the closing costs.

“A borrower could conceivably wind up with a loan-to-value ratio of 105 percent of the property,” Parsons said.

Will more no-down programs follow?

Chrane said he believes that more lenders will begin their own programs.

“No. 1, there is a need for it,” Chrane said. “Downpayments have always been an issue. In my opinion, they are a bigger issue today than in the past, at least in recent history. It is just harder and harder for the millennial generation starting to become homeowners.”

Not everybody in the industry sees a big future for no downpayment and low-downpayment programs, however.

Ray Brousseau, president of Carrington Mortgage Services, said that zero and 1 percent downpayment programs tend to be difficult to execute. The programs can be useful for marketing, however.

“I think the value in having the program is for your sales organization to create interest in an opportunity and get folks to come onboard and talk to you,” Brousseau said. “When it comes to actual fulfillment and the use of those downpayment-assistance programs, at least from my experience, it has been quite limited.”

Mortgage risk analysts tend to frown on these programs, as they are usually combined with a 30-year fixed mortgage, which builds equity at a slow rate and is at a higher default risk because of its long duration. 

Ed Pinto, co-director of the American Enterprise Institute’s International Center on Housing Risk, said the market appears on the same slippery slope that led to the last housing bubble and crash a decade ago. He noted that, in addition to agreeing to pilot these very-low downpayment grant programs with lenders, Fannie also recently relaxed its debt-to-income limit.

“Of course they never say [these moves] are dangerous,” Pinto said. “No Fannie Mae announcement has ever started with, ‘What we are proposing is dangerous. Therefore, we are doing it.' But how many things have they done that are dangerous?”

Movement Mortgage’s O’Daniel said the company took a year in developing its pilot. The program, still considered a pilot, is open to first-time homebuyers in 47 states, and is needs based. A person’s income can’t exceed certain levels. In terms of safety, he noted that the borrower never has to repay the grant, and so automatically winds up with 3 percent equity in the 30-year fixed loan. For added safety, Movement also requires borrowers to complete a homeowner-education class, and they are insured against job loss.

“At the income [level], at the credit [level], they are qualified in every way, but it can be a hurdle to save that downpayment, especially for folks that are in that low to moderate income bracket,” O’Daniel said. “We wanted to help them.”