by Michael H. Wasserman
Apparently, we have learned nothing over the last 8 years. Folks are actually starting to tout no and low down payment loans again. Worse yet, many consumers seem ready to follow their suggestions.
Back before the bubble burst, the markets were giddy with buyers purchasing homes and investment properties with no (or next to no) down payments. Conventional wisdom at that time held that property values could only go. up. Huge equity gains were inevitable. Profits would flow to anyone smart enough to buy a home - even more so for those who bought without actually paying anything out of pocket.
Then the market collapsed in 2007 and the fallacy of that theory became painfully apparent. Property values plummeted. Owners went from no equity to negative equity. Severely. HELOCS were frozen or worse yet, called due by lenders. Properties became unsalable - sellers could not afford to pay out the shortages. You remember, don't you?
The after-effects from all of the resulting delinquencies, defaults and foreclosures are still with us. Thousands of families displaced by the loss of their homes. Countless others still cannot move, or have become "accidental" landlords renting out properties they cannot sell, owing more to their mortgage lenders than their homes are worth. Many have sold short. Some lenders forgave that debt, triggering huge income tax liabilities for borrowers. Others sold their homes but still retain repayment obligations (deficiencies) to their lenders. Many, many have - or will - file for bankruptcy too.
Things are getting better to be sure, but I still see more than my share of short sales, REOs, and sellers forced to write checks at their closings to cover their sales. As optimistic as I am for the spring and summer markets before us, no reason to believe that the distress sales are now all behind us. Would anyone who lived through this once buy a no down payment home again?
Small down payment loans did not (by themselves) cause the markets to unhinge, but homeowners holding more equity in their properties certainly weathered the economic storm better than those who did not. We all lost net worth, but many of us have stayed in our homes and are emerging (more of less) unscathed.
But home ownership remains the American dream and getting there without having to fork over a large down payment is certainly as tempting as ever. Buying real estate for little or nothing down is still the holy grail for many and folks are actually touting these strategies again. Not just in hushed whispers from ill lit alleyways.
Take the good folks at the Ready for Zero Blog who posted this article last week, since picked up and rebroadcast at Lifehacker, breaking down several different ways to do just that. Then check out the comments below these articles to see the reaction of blog readers. The author does give a head nod to higher long term costs when buying this way, but offers no warnings about the risks buyers take should values decline or life circumstances change.
Truth be told, I have not yet worked with home buyers using conventional financing to buy homes without down payment, nor have I seen or heard that these arrangements are actually being utilized. Notably, the article's author did not name any specific lenders will to make these loans either, so it is a bit hard for me to gauge whether this is even a viable possibility. On the other hand I have worked with several (well qualified) buyers who have used VA loans and other narrowly defined subsidies / loans offered to help home buyers acquire properties in specific targeted urban neighborhoods or for employees make affordable purchases.
I do appreciate that vets, teachers, and urban "pioneers" are afforded these special opportunities. A grateful nation does precious little to support our defenders once their service is completed. The opportunity to default on a home loan is the least we can do to say thanks.
But, these loan are not for everyone. Far from it. These are high stakes gambles and I fear for anyone who reads these articles touting no down payment loans who might not consider even a cursory warning of the risks Those writers? probably have never heard of George Santyana either.