Orange County’s Credit Union is bringing back one of the villains of the 2008 financial crisis—the no-money down payment mortgage.
“As our members were trying to save for a down payment, the average house was appreciating 5.4%, and it would cost them thousands more,” said Carlos Miramontez, vice president of mortgage lending at Orange County’s Credit Union, the third largest in the county.
“We were looking to create a product to solve that particular conundrum.”
Other OC companies are offering mortgages with as little as 1% down. It’s causing a sense of déjà vu that this isn’t going to end well.
“We get that question all the time—will this cause a repeat of 2008?” said Frank Fuentes, the national vice president of multicultural community lending at Tustin-based New American Funding, the 16th largest nonbank mortgage lender in the U.S.
OC is often considered a trendsetter nationally in the mortgage industry because of its deep pool of talent and the fact that four of the 25 largest U.S. nonbank mortgage lenders have their headquarters here.
OC was also prominent a decade ago when it was home to eight of the 12 largest subprime lenders that are often blamed for the 2008 financial crisis.
The no-down-payment mortgages were cited as one of the reasons for the fiasco, according to a government commission that investigated the crisis.
“You were able to get into the house with no skin in the game,” said Fadel Lawandy, director of the C. Larry Hoag Center for Real Estate and Finance at Chapman University. “It definitely exacerbated the situation. The moral hazard of having the ability to purchase without a down payment still exists.”
Different?
Things are different this time, Miramontez insisted.
“This is definitely not a stated income loan, not interest only, not negatively amortized,” he said. “It has much more responsible lending standards.”
The credit union isn’t providing subprime lending, as credit scores over 720 are required. Mortgages must be for owner-occupied homes, not rental or vacation properties. The no-payment-down mortgages are up to $500,000, which rules out many homes in the county.
To be sure, the credit union has funded only six no-money-down mortgages out of 102 since April. Another five mortgages were approved with 3% down, which permits purchases of up to $850,000.
The credit union mitigates risk by requiring mortgage insurance. It’s on the line if the mortgage goes bad because it keeps the loans in its portfolio rather than selling them as many other originators do.
The credit union makes better money on the no-payment-down by charging half a percentage point higher than a borrower with a 10% down mortgage, Miramontez said.
Quite Risky
The no-down-payment mortgage is offered by only a handful of entities nowadays in the U.S., most notably through Veterans Affairs.
Most lenders don’t provide zero-payment mortgages, said Attila Morgan, manager of community engagement for Huntington Beach-based NuVision Federal Credit Union, the second largest credit union in OC.
“They are quite risky,” she said. “If the market goes down, people are very quick to walk away from their mortgages, and the lender is stuck with the loss. That’s the main reason we don’t do them.”
NuVision does offer loans with 3% down. Some communities will provide financial help with the down payments, but those offers often come with liens attached to the property, Morgan said.
Foothill Ranch-based loanDepot LLC, the nation’s second largest nonbank mortgage originator behind Quicken Loans Inc., doesn’t provide zero-down loans except for qualified military veterans.
“With that said, loanDepot works with hundreds of bond programs, including grants that do not require repayment, to help qualified consumers minimize down payment and closing costs,” said Dan Hanson, loanDepot’s chief retail production officer.
LoanDepot also ups the competitive pressure by offering a “lifetime guarantee” on mortgages by waiving lender and appraisal fees on any future refinances.
The pressure to originate mortgages to keep market share was a key reason for the large increase in mortgages and the lowering of standards in the 2000s, according to the Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States.
“I don’t think there’s a lot of pressure” in the current market, Fuentes said. “There’s a healthy percentage of homebuyers with down payments at least 10% or more.”
Pressure on Government
However, there is pressure on the government to address the affordability issue of buying a home, particularly for college graduates saddled with high student debt.
“I’m seeing a trend of the guidelines of qualifying for a mortgage is becoming less stringent compared to about two years ago,” Chapman’s Lawandy said. “The guidelines have gotten looser to combat the affordability issue.”
In OC alone, the median sales price was $690,000 in July, up 7.9% from a year earlier and a two-thirds increase over 2012, according to CoreLogic. Nationally, home prices have risen about 43% in the past five years, according to CoreLogic’s Case-Shiller U.S. National Home Price Index, which tracks housing prices in 20 cities.
Fannie Mae and Freddie Mac, the two large government-sponsored entities that purchase mortgages and sell them to Wall Street, began accepting mortgages in 2014 with as little as 3% down.
In reality, that rate is as low as 1% because the originators will put in 2% when competing for that loan, Miramontez said.
However, Freddie Mac is having doubts, as it said it will no longer accept only 1% down as of November and will require a 3% down payment. Fuentes said he is hopeful Fannie Mae will still continue accepting the 1% down mortgages.
No Heartburn
Fuentes, who was at New American Funding during the 2008 crisis, agreed that low-down-payment mortgages have different requirements than a decade ago. Prior to the 2008 crash, many of the zero-down-payment mortgages relied on “stated income,” which became notorious as liar loans because the borrowers’ income wasn’t verified.
“Nowadays, full documentation is required,” Fuentes said.
Also, debt to gross income can’t top 43% for low down payments, Fuentes said. Other loans with larger down payments can have ratios closer to 50%, he said.
If current requirements remain, the no-down-payment mortgages may not become widespread in OC. Jumbo mortgages, a popular financing technique for large mortgages here, often require 10% down payments.
Orange County’s Credit Union’s limit of $500,000 for a no-payment-down mortgage indicates that it likely will remain limited to condominiums rather than homes and thus won’t be widespread.
Miramontez said the 2008 drop in home values was an outlier and that a decrease may be more in line with other periods, like the early 1990s.
“We’re not nervous, because we’re doing it in a safer way,” he said. “It doesn’t put any heartburn into our thoughts.”
