The Housing Market Is Going Insane | $0 DOWN MORTGAGES ARE BACK

What's up, Graham? It's guys here. So, with housing prices beginning to decline, mortgage rates approaching 6%, and home buyer affordability falling to its worst level in 37 years, banks have started to once again bring back no money down loans for certain buyers. Except this time there's a bit of a catch. Even though they say the goal is to help more modest income and first-time home buyers achieve the American dream of home ownership, others argue that this could lead to a repeat of 2008, while banks offer overly inflated negative equity loans. Home buyers could quickly find themselves underwater the moment they decide to sell.

So, let's discuss exactly what's going on, why no money down loans are suddenly coming back in popularity, and what this means for the entire market. Because I have to say, most people are completely unaware that these loans even exist right now, and there are some downsides that everyone needs to be made aware of. Although before we start, if you enjoy these videos where I just cover the facts, it would mean a lot to me if you hit the like button or subscribed for the YouTube algorithm. It's totally free; it takes you just a split second. And, as a thank you for doing that, here's a picture of a Regal angelfish.

All right, so first let's talk about the no money down loan from Bank of America. This was launched as a brand new pilot program that aims to help underserved neighborhoods and designated markets throughout Charlotte, Dallas, Detroit, Los Angeles, and Miami. This would allow individuals and families to obtain an affordable loan with no money down, no PMI, no closing cost, and, to many people's surprise, no minimum credit score. Instead, Bank of America is able to use what's called the special purpose credit program, which takes into account other factors like timely rent, insurance, utility, and phone payments. Then they create a score from which they determine your qualifications. This way, they won't have to conform to normal credit standards while approving those who otherwise have always paid their bills on time.

Even though these loans are intended to help underserved minority neighborhoods, eligibility is based entirely on income and home location, with prospective buyers being required to complete a home buyer certification course prior to applying. This means that any first-time home buyer is able to apply, as long as the home falls within a certain zip code. On top of that, even though it's technically no money down, according to Bank of America, the company will make a down payment for the client in the form of a grant of up to $115,000, giving them immediate home equity.

However, others are worried about this new direction, given the fact that many of these companies, including Bank of America, have been the subject of predatory lending in the past. So, how does this differ from the 2008 housing crisis? Well, here's where things get interesting and where you could start to see the similarities. Back in 2004, guidelines opened up that allowed agencies to issue riskier subprime loans in order to meet affordable housing guidelines. In other words, Housing and Urban Development wanted to improve home ownership for those who didn't have the finances to afford a home. So, they allowed for no down payment, stated income, and balloon payment terms to ensure that anyone who wanted to buy a house had the means to go and buy a house.

Because of that, from 2004 to 2008, real estate went through an unprecedented period of growth, driven by Ninja loans, which allowed home buyers to obtain a loan with no income, no job, no assets—just sign the dotted line, and the home is yours. Now, in a market that just continually goes up, it doesn't really matter because a buyer would be able to sell the property for a profit in the event they can't make the monthly payments. But as more and more of those buyers started placing their homes on the market, prices began to fall.

From that point on, once buyers realized that they couldn't sell the property and they owed more on the home than what the home was worth, they stopped making payments to the banks. That caused a wave of foreclosures, with one in four loans being underwater and a housing disaster that resulted in hundreds of banks either shutting down or being bailed out entirely. Now, today's market, on the other hand, is entirely different. Buyers are generally required to put anywhere from 15 to 20% down, have a stable income, obtain a fixed-rate loan, and have enough cash sitting in the bank to pay for the closing costs.

That means that homeowner equity in 2022 is at an all-time record high, but that also means that millions of buyers are priced out of the market and unable to purchase something when prices are more than double where they were since prior to the pandemic. Because of that, zero down payment loans are beginning to return from the exact same banks that were fined for discrimination in the last housing run-up. So, how is this any different, and is there a risk that history could repeat itself?

All right, now in terms of Bank of America's zero down program, I have to say on the surface it doesn't have a lot of the red flags that were associated with the 2008 housing crash. Even though homeowners are putting no money down, with no PMI and no closing costs, they are not getting variable interest rate loans, which arguably is where a lot of the initial trouble started. Like when people get a loan on the premise of only being able to afford the introductory rate payments, it sets them up for failure when those rates inevitably increase. But this time around, those buyers are being funneled into fixed rate payments, so their monthly payment is always going to remain the exact same.

Second, it's currently a pilot program within certain cities and approved zip codes. So, even though anyone is able to apply who meets the eligibility requirements, it's not prolific enough to make any meaningful effect on the real estate market on a large scale. Now, third, when people hear no minimum credit score required to purchase a home, it's reasonable that that would draw some suspicion. After all, this was a common offer throughout many of the 2000s loans that eventually ended up in foreclosure. But I actually agree with the special purpose credit program, which allows buyers to use other metrics to determine eligibility. After all, it's shown that by including phone and utility payments, lenders could get a similar risk model and default rate to calculating credit cards and loan payments.

So, it makes sense to include alternative data to give borrowers loans who otherwise would not have qualified. And fourth, unlike the 2000s, no income, no job, no asset loans, Bank of America is looking at income, employment, and current assets to determine eligibility. But, like I mentioned earlier, not everything is as good as it seems, and there are some downsides that you have to be made aware of.

Now, first, I think it's easy to have the narrative that banks are running out of people to lend money to, so that they're lowering requirements to issue more loans. Sure, I bet there's some aspect to this that has to be financially profitable for the bank to operate this as a business, but I think it's very important to mention that Bank of America is not the first bank to offer no money down. For example, Legacy Home Loans offered eligible candidates in six US cities to pay 1% down, with a free appraisal, free home warranty program, home buying counseling, and financial assistance with closing costs. State Employees Credit Union also offered this in North Carolina with up to 100% financing, no down payment mortgages without any PMI.

USDA loans also offer something similar for buyers who want 0% down. FHA Loans have required 3.5% down with FICO scores as low as 580, and many VA loans require no money down as long as the appraisal isn't lower than the purchase price. However, the biggest risk that I see in all of this is that by offering a no money down loan during the same time the prices are near a record high, is going to expose a buyer to a lot of risk. In the event the market goes down, they lose their job, or they see a reduction of income and have to sell their home.

Just consider this: let's say you buy a home for $400,000 with 0% down, a $15,000 Bank of America grant, and a loan of $385,000. If the market stays exactly the same and you want to sell your home one year later for $400,000, 6% commissions and closing costs would leave you with $376,000 left over. Meaning you would have to come out of pocket $9,000 to exit your loan and walk away. Now, if home values dropped by 5%, you would be left over with $357,000 after closing costs, meaning you would have to come up with $228,000 out of pocket just to sell your home, on top of paying mortgage interest, property taxes, insurance, and maintenance every single month.

Obviously, that presents a substantial risk that most likely the person putting no money down is not going to be able to come up with all the money needed to pay out of pocket to sell in the event the market goes down or something happens. Unless prices just keep going up, they're going to be stuck making those payments, whether or not they're able to pay.

Now, in terms of my own thoughts on this, as both a homeowner and a real estate investor, I hate to say it, but even though this could wind up helping a lot of people, at the end of the day, banks are in the business of making money. When loans are usually flipped to a third party for a profit, most likely that extra cost is being passed on somewhere in your loan. After all, banks follow a guideline to issue loans that fit a certain risk profile at a certain return; otherwise, they'd be sitting on high-risk loans, tying up capital that they can't get off their balance sheet.

So, even though it's no money down, no PMI, no closing costs, that probably means that your balance or interest rate is going to be slightly higher than it would otherwise. Now, that's certainly not the end of the world, and it could end up benefiting a lot of people who otherwise may not have been able to purchase a home, but it does mean that borrowers have to be incredibly careful to understand what they're signing up for.

There's also the reality that by owning a home, you're responsible for property taxes, insurance, maintenance, repairs, and a variety of other random expenses that you never even think about until something breaks, and that needs to be considered. Now, I doubt the banks would just take anybody who walks in, and they made it abundantly clear that their loans are subject to extensive underwriting, on-time payments, and a completion of a home certification course. But banks are in the business of making money, and you have to be incredibly careful anytime you make such a large purchase, no matter who you bank with.

So overall, no, this is likely not going to have a dramatic effect on the entire market, and only certain neighborhoods would even qualify. But there is a risk to buyers who would be unable to sell their home if they owe more money than they could get after closing costs, and that to me is the biggest red flag.

Aside from that, it'll be interesting to see how this program evolves and if they end up continuing this on a larger scale. But let me know your thoughts on this down below in the comments section. Let me know if you think it's a good idea, if this is something you're interested in, or if you think it's a bad idea. I read all the comments, so let me know your thoughts down below. I really appreciate it.

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