Warning: Zero-Down Subprime Mortgages Could Be Making a Comeback

Warning: Zero-Down Subprime Mortgages Could Be Making a Comeback

Jason Moser: I wanted to follow up our discussion
on banks with this article I was reading last week. You and I did a double take,
we both saw this. Thousands Line Up for
Zero Down Payment Subprime Mortgages. And I thought when I read this initially,
"Wait, this has to be referring to something that happened in the past
that's not going to happen again." But sure as shooting, this is a situation
where borrowers are now getting the opportunity to line up to get, basically,
zero down payment mortgage for a house. On the one hand, I love the fact that we have
an economy that can give people a chance like this. On the other hand, these are not
borrowers with really good credit scores. With no skin in the game and a bad credit score
to begin with, especially in an environment where, apparently, the FICO score is as high
as it's ever been for most, I don't know that this is really a good idea.
What do you think about this? Matt Frankel: From both an investor's perspective
and a financial planner's perspective, I always say that there are three things that you need
to have in an ideal mortgage candidate.

You need proof that you can pay it back –good
income, stable employment, things like that. You need a strong credit history.
And, you need a down payment. You need to have skin in the game. In the past, I've said that if you're missing
one of those, it's not terribly troubling. For example, if you have low credit but you're
putting 20% down and you have a great job, it could certainly make
sense to give you the loan.


When you're missing more than one of those
things, like in the mortgages that are starting to pop up now, no down payment and no strong
credit history, that's when I start to worry a little bit. During the financial crisis, we saw people
who got mortgages without having all three. Those aren't coming back just yet, but this is
definitely not a step in the direction I want to see. It is worth mentioning that
these are primary residence only homes. These are not investment mortgages. That's also a big distinction of what
we saw leading up to the financial crisis. But even so, borrowers lacking two of the
three major components that you should have when you get a mortgage,
that's kind of troubling to me.

Moser: I should say, too, it does appear that
the financial institution that's backing this up, there is an education
component here that is required. And I applaud that, I think it's good.
I'm just not quite sold on the idea. But perhaps this is a small test, they look at this as
something that might be worth expanding in the future. They'll use some of the data and the learnings
from this and that'll help dictate, perhaps, what they do in the future.
Just a bit of an eye-catcher. One way or the other, we'll learn more here
in the coming years as to whether it works out or not..

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