Surprisingly, Zero Down Mortgages Are Back

Todd Moses
May 30, 2024

Under a new program launched by United Wholesale Mortgage, one of the largest U.S. mortgage lenders, home buyers will be able to buy a home without putting any money down.

Inputs that matter: The Michigan-based company’s new program will be available to first-time home buyers and people earning at or below 80% of an area’s median income, the company said in a press release.

  • UWM (UWMC) will give eligible buyers a second-lien loan of up to $15,000 in the form of down-payment assistance for 3% of the home’s purchase price.
  • The loan will not accrue interest or require a monthly payment.

The opportunity: “Homeownership is something we’re very passionate about,” Melinda Wilner, chief operating officer at UWM, told MarketWatch.

  • The company had previously allowed buyers to put down as little as 1% on their homes, but she said it wanted to go further to help home buyers.
  • Wilner added that the lender is anticipating a higher volume of borrowers with its new zero-down program.

Zoom in: Mortgage rates began rising again last week, immediately impacting what had been several weeks of strengthening mortgage demand.

  • The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 7.05% from 7.01%, with points rising to 0.63 from 0.60 (including the origination fee) for loans with a 20% down payment.
  • As a result, total mortgage application volume fell 5.7% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

Between the lines: Similar secondary mortgages for down payments are causing significant issues for many homeowners who purchased homes before 2008.

  • They were subordinate to the primary mortgages, where the primary mortgages had the first claim on everything, and the secondary mortgages got whatever scraps were left over.
  • Once home prices crashed after the Great Financial Crisis, these secondary mortgages traded at pennies or fractions of a penny on the dollar.
  • They were believed to be worthless with zero probability of being paid back.
  • However, as home prices increased, the investors buying these second mortgages could profit from forcing foreclosures, creating Zombie mortgages.

Follow the money: Meanwhile, About 1.7 million homes were bought in 2019 using ARMs.

  • Many were "5/1" loans: five years of a lower fixed interest rate, then a conversion to a market-based rate adjusted once or twice a year.
  • That means a mortgage based on a 2019 interest rate of 3.5% or even lower may balloon to around 6.5% with a significantly higher monthly payment.
  • According to a Bloomberg poll conducted by CivicScience Inc., around 10% of ARM holders said that they could fail to meet their obligations or postpone their mortgage payments when their ARM adjusts to market rates.

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Read More

  1. https://mishtalk.com/economics/zero-percent-down-mortgages-return-what-can-go-wrong/
  2. https://banananomics.co/the_truth_about_zombie_mortgages_and_foreclosures
  3. https://www.morningstar.com/news/marketwatch/20240523224/one-of-the-biggest-us-lenders-is-offering-0-down-payment-mortgages-for-first-time-home-buyers-heres-the-catch
  4. https://www.newsnationnow.com/business/your-money/mortgage-crisis-looms-for-millions/
  5. https://www.nbcnews.com/business/real-estate/weekly-mortgage-demand-drops-three-month-low-rates-begin-climbing-rcna154497