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A defense of zero down mortgages

Posted by Scott Van Voorhis September 14, 2010 06:42 AM

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Ready or not, here come those zero down loans again.

I blogged here a few weeks ago about a new mortgage program MassHousing rolled out over the summer, with the backing of Fannie Mae, under which borrowers don't have to fork over a down payment.

I noted the initiative comes with the federally-controlled housing finance behemoth already in hot water amid a sharp spike in defaults.

Upon some further reporting on my part, it turns out these new, no-money-down mortgages are taking off fast here in the Bay State. (As far as cash up front, the only requirement is ponying up $1,000 in advance toward closing costs.)

MassHousing, as of a couple weeks ago, was on track to ink 400 of these Affordable Advantage mortgages in the program's first year. That would amount to 18 percent of the mortgages MassHousing expects to write, though the number will likely settle out closer to 7 percent, officials contend.

Thomas Gleason, the long-time affordable housing advocate who heads MassHousing, has come forward with a spirited defense of the initiative.

I laid out the details in my weekly Banker & Tradesman column on Aug. 30th. Here's a Sept. 4th piece by The New York Times that takes a national look at the effort - Massachusetts and a couple other states are doing this.

While acknowledging the controversy around zero down loans, Gleason contends the concern is misplaced.

And I think he has a point on this - somehow the MassHousings of the world are being conflated with the subprime lenders of old by conservative critics looking to score political points at the expense of do-gooder liberals.

I'm generally no conservative, but I've taken my fair share of shots as well.

Yet let's get real here. For the only possible similarity between MassHousing's new Affordable Advantage mortgages and the shady subprime loans of the bubble years are the waiving of a down payment.

That's where the similarity ends. The subprime mortgage firms of old stuck their hapless customers with endless hidden fees and charges and left them to choke on teaser rates set to skyrocket a few years down the road. These were loans designed to simply to enrich shady lenders and brokers. And they were all but destined to self destruct.

MassHousing's Gleason points to two safeguards the state housing authority has put into place on its new, Affordable Advantage mortgages.

First, borrowers interested in taking out a 100 percent loan-to-value mortgage will have to show a credit score 720, up from 680 previously. Secondly, they can't have more than a 41 percent debt to income ratio, Gleason notes.

Historically, default levels of MassHousing borrowers with these credit scores has been extremely low, he contends.

OK, fair enough. But I still contend it is important for a home buyer to have some skin in the game - and a down payment, even a modest one, ensures that.

In an age when banks are requiring other homebuyers to put down 20 percent, it can smack of a free lunch.

But I commend Gleason for having the guts to come forward and make his arguments directly - a refreshing change from the duck-and-cover state bureaucrats typically do when caught up in a potentially controversial issue.

And I think he has some great points - it's just wrong to equate MassHousing and other state housing authorities across the country with the subprime bad boys of old like Fremont, Countrywide and Argent

That doesn't mean that we shouldn't watch vary carefully how these loans perform. Fannie Mae's troubles are particularly disturbing right now and I am in no mood to give them - or anyone else - a free ride.

But it is also important to keep context.

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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About boston real estate now
Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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