By Robin Stansbury and Kenneth R. Gosselin, Tribune Newspapers: The Hartford Courant
August 24, 2007
The popular financing option, which require no down payment and finance 100 percent of a home loan, is being eliminated or strictly curtailed by lenders across the United States.
That means buyers once again must come up with cash for a down payment, at a minimum 3 percent of the purchase price but usually more, to avoid costly mortgage insurance premiums that can add hundreds of dollars to a monthly payment.
The change is expected to hit first-time buyers hardest. That, in turn, would withhold buyers from an already weakened market where the supply of houses and condominiums far outpaces demand.
Mortgage lending standards have tightened for many borrowers in 2007, particularly those with spotty credit histories, the so-called subprime market. But a wide-ranging elimination of zero-down-payment mortgages is a signal that the crunch is spreading more broadly, to people with a solid record of paying bills but who don't have a lot saved for a down payment.
"If someone walks in today with an A-plus credit history and a $200,000 salary but no money for a down payment, I can't help them anymore," said Michael Menatian, president of Sanborn Mortgage Corp. in West Hartford, Conn.
The company was notified by its lender that the lender no longer will cover no-money-down loans.
In recent years, no-money-down mortgage loans have helped buyers, especially those new to the market, stretch their budgets and get into homes they might not otherwise have been able to afford.
Four out of 10 first-time buyers used no-down-payment mortgages in 2005 and 2006, according to surveys by the National Association of Realtors.
"There is a credit squeeze occurring," said Michael Sheahan, director of mortgage banking at Webster Bank, one of Connecticut's largest banks. "There is less money available for less credit-worthy borrowers or those providing less documentation on their loan."
So far, Sheahan said, the squeeze hasn't crossed into traditional mortgage products that include a down payment.
The move by lenders away from the zero-down mortgages will not affect only people of modest means. It also will squeeze young professionals who have high salaries but little money for a down payment because of costly student loans.
Katie and Allan Chipps locked into a no-money-down mortgage through Sanborn earlier this month, on the last day they were offered.
Securing that loan allowed the couple to submit a competitive offer on a new house they are buying in West Hartford, they said, without having to add a contingency clause to sell their current home first.
"We would not have been able to make a competitive offer on a home without this mortgage product," she said. "It gives us flexibility in pricing our home and in using the proceeds from that sale."
It wasn't that long ago that home buyers needed to put 20 percent down to buy a home. But over the last decade, mortgage products that required 10 percent, 5 percent or even as little as 3 percent became available, and popular.
Buyers putting down 10 percent or less generally were required to buy mortgage insurance, a costly addition to monthly payments.
But over the last five years or so, buyers learned to avoid that by securing two loans -- one covering 80 percent of the purchase price and a second loan that covered the remaining 20 percent at a slightly higher rate.
Combined with no-down-payment mortgages, some buyers were able to obtain houses priced at $550,000 while paying only $500 out of pocket.
With a strong housing market where prices were climbing, lenders were willing to look the other way on these deals, mortgage brokers said.
"Now, with values dropping, if someone got into trouble, they might just walk away (from the house)," Menatian said, because they've got no money of their own tied up in it.
That would leave lenders stuck with a loss. And that prospect is spooking lenders rocked by turmoil after the collapse this year of the subprime mortgage market.
That industry swelled to $1.3 trillion over the past few years, fueled by Wall Street's easy money. But as home prices sagged and more borrowers missed payments on loans, the industry buckled.
Two of the country's biggest home lenders -- American Home Mortgage Investment Corp. and New Century Financial Corp. -- have filed for bankruptcy.
Earlier this year, Mortgage Lenders Network also filed for bankruptcy and folded, costing 1,800 workers their jobs.
Stocks of many surviving lenders are at multiyear lows, and it is common to find shares in the industry that have lost 90 percent of their value in the past six months, or even weeks.
"What we are seeing now, because of this, is a back-to-basics lending," said Jeff Lipes, president of Family Choice Mortgage in Wethersfield, Conn. "It's a return to where we were in the mid-1980s, where Fannie Mae and Freddie Mac were the main products and you had to put down 3 to 5 percent."
The government-sponsored Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Mortgage Corporation) set underwriting standards for mortgages because they buy ones that meet their guidelines and sell them on the secondary market as securities.
"I don't think that's a bad thing," Lipes said.