| For those who lived through the 2008 housing market crash, the words “zero-down mortgages” might need to come with a trigger warning. Now in 2022, no downpayment mortgages are making a return, but let’s not give in to the slippery slope fallacy and panic before reading the fine print. What’s going on? Word has gotten around that zero-down mortgages are back mostly because of Bank of America’s new “zero downpayment” program. BofA and others like JP Morgan Chase and TD Bank have also created similar programs, with each bank allocating billions to the cause. The program aims to provide select groups of first-time homebuyers from mostly black and Hispanic neighborhoods the opportunity to become homeowners to close the homeownership gap in the US. Instead of requiring a credit report, programs like these will evaluate applicants based on things like income, rent and bill payment history, and other financial measurables not accounted for by a simple credit check. The name is a slight misnomer though because BofA is helping homebuyers with the down payment via a grant of up to $10,000-$15,000, giving buyers real equity in the property from the start. Then and now - What happened in 08’: Zero-down mortgages and subprime lending are sore subjects for many Americans because of the wreckage those practices caused in 2008. A confluence of events including low rates, lax lending, adjustable rates, and rampant speculation in the secondary markets (MBS & CDOs) created a disastrous situation when rates rebounded and home prices dropped. The tide went out with millions skinny dipping, and the markets collapsed across the board.
- How it’s different now: Leading up to the crisis back in 2005, adjustable rate mortgages (ARMs) made up about 35% of the mortgage market — now they account for 10%. Household debt relative to disposable income was also at all-time highs back then and is now the lowest it’s ever been. Additionally, lending requirements for both borrowers and lenders are much more stringent now.
- It’s important to note that zero-down programs like those being offered now aren’t representative of something as infectious as the widespread lending practices of 2008, so there’s no need for panic. Nevertheless, these programs do come with their own unique risks, so they should be evaluated carefully before being accepted.
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