Here's how the 100 percent financing has worked: Lenders sell borrowers two loans — one, a mortgage for the bulk of the house cost, and another to cover the down payment. The big loan is a first lien on the house, the second takes a subordinate position in case of default, so it goes for a higher interest rate. The loan package is split into two because most lenders require borrowers to buy private mortgage insurance (PMI) — to cover the payment in case you cannot -- on mortgage loans greater than 80 percent of the value of the house they're buying.
But, lenders have actually seen this backfire on them!
Now, not only are lenders (slowly) concluding it was risky to have borrowers overloaded with debt, they are also seeing, in the recent tide of foreclosures, evidence that when homeowners have no own money tied up in a house, it's emotionally and financially easy for them to walk away.
No duh. Until the “balloon” note comes due, you’re “selling” people an apartment with its own front yard. I heard stories about at least one person in Lancaster who deliberately treated his zero-down “purchases” that way, walking away just before the balloon came due.
Ending zero-downs will also end other practices:
The return to traditional loan requirements includes ending the practice of removing taxes and insurance from the payment for which a borrower qualifies, says McHale at Freddie Mac. In recent years, some lenders qualified borrowers based just on their ability to cover the monthly mortgage payment. Now, be prepared to demonstrate that you can make not just the monthly mortgage but the entire ball of wax, including taxes and insurance.
Frankly, I find loans that didn’t include taxes and insurance, or even discuss them, to be predatory on financially illiterate people.
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