No-Money-Down Mortgages: Still Not Dead

Nick Timiraos has an important front-page WSJ article today on the reappearance of no-money-down mortgages. At 1,500 words, it’s far too long – Robert Thomson clearly has a ways yet to go before he achieves the Murdoch dream of short and punchy articles. But if I were a mortgage lender operating in the current market, I’d be hanging on every word.

The problem is that even if lenders aren’t offering 100% mortgages any more, on the grounds that they tend to default at very high rates, their borrowers might still not in reality have any skin in the game. In which case their default probability is likely to be much higher than their models are telling them.

For sellers, by contrast, these things are great. Don’t drop your price by 10% or 20%: if you do, many potential buyers still won’t be able to come up with a down payment. Instead, keep the headline price unchanged, and funnel the price-drop through a non-profit "down-payment-assistance program". Presto, you’re effectively making the buyers’ downpayment for them, allowing them to buy with no money down, which allows you to sell your house.

Who loses? The lender, for starters: it isn’t modelling no-money-down default rates. And also the taxpayer: a lot of these mortgages are being backed by the Federal Housing Administration.

These schemes also have the effect of artificially inflating nominal house prices, since the sale price is not the same as the amount netted, at the end of the day, by the seller. I’m sure that a lot of politicians and realtors reckon that house prices need all the artificial inflation they can get at the moment, but my feeling is that over the medium to long term, no good can come of this.

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