Risk Of No Down Payment Mortgages
There is longstanding and overwhelming statistical proof that zero down payment home buyers default on mortgages at a far higher rate compared to home buyers who make a down payment. This matter has lately received more attention than in the past due to the large number of foreclosures related to zero down payment purchases during the housing bubble years. In 2005, for example, nearly half of all home purchasers were made with zero down payment mortgages.
Zero Down Payments = Foreclosures
Could FHA’s rising delinquency rate be due to FHA incorporating risky practices that have become standard in the mortgage industry? Since industry experts often cite 100% financing as being a major factor in the mortgage meltdown, let’s take a look at borrower down payment sources:
The delinquency rate clearly rises in tandem with the increase in non-profit funded down payments.
In 2005, HUD commissioned a study entitled “An Examination of Downpayment Gift Programs Administered By Non-Profit Organizations”. Later that year, another report titled “Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance” was completed by the U.S. Government Accountability Office. Both studies concluded that seller funded down payment assistance increased the cost of homeownership and real estate prices in addition to maintaining a substantially higher delinquency and default rate.
No Skin In The Game
The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home.
Instead, the important factor is whether or not the homeowner currently has or ever had an important financial stake in the house. Yet merely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan.
Rather, stronger underwriting standards are needed — especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell.
Wells Fargo Initiates Down Payment Assistance Program
Ignoring the overwhelming evidence of high default rates on zero down payment purchases, Wells Fargo (WFC) this week announced a major nationwide down payment assistance program (DAP) to be used for down payment and/or closing costs on FHA, VA and conforming loans. Incredibly, the program is being advertised as a means of helping low to moderate income applicants achieve the “American dream” of home ownership.
Based on the historical evidence, Wells Fargo is sowing the seeds for the next major crop of foreclosures. Incredibly, this is being done even as the current foreclosure crisis grows in intensity. Approving mortgages that immediately put new homeowners at a high risk of default is financial lunacy and a disservice not only to the homeowner but to a nation already in financial chaos due to defaulting homeowners.
Down Payment Assistance Programs (DAPs)
Help More Low- and Moderate-Income Borrowers Achieve Home Ownership.
Refer your low- to moderate-income applicants to local housing agency contacts and help them achieve home ownership by using one of these Downpayment Assistance Programs (DAPs) approved for use with a Wells Fargo Wholesale Lending first mortgage. DAPs provide financial assistance for qualified borrowers and, depending on the program, may be used for debt reduction, down payment and/or closing costs on FHA, VA and Conforming Conventional loans.