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Critics see major red flags over new ‘zero down payment’ mortgages that led to the Great Recession

September 9, 2022 | | Print Article

In an attempt to cater specifically to blacks and Hispanics, a number of banks are repeating the mistakes that preceded the Great Recession and offering home mortgages with no closing costs, no down payments, and/or no minimum credit score requirements.

Leading the charge is the Bank of America, which is offering all three ostensibly to anyone of any race who lives in a predominantly black or Hispanic neighborhood.

“[A]imed at predominantly minority neighborhoods,” according to Yahoo News, the bank’s plan offers home loans “without the need for a down payment, closing costs or private mortgage insurance (PMI), an extra cost that’s customary for buyers who put down less than 20% of the home’s purchase price.”

The plan also “requires no minimum credit score, with eligibility focused instead on a borrower’s solid track record of rent payments and regular monthly bills like utilities and phone.”

Fox Business Network notes that TD Bank and JPMorgan Chase have launched similar initiatives.

“In March, TD Bank launched a similar program that includes a $5,000 lender credit that qualifying borrowers can use on home purchase closing costs or down payments. Qualifying borrowers must meet certain credit and income parameters, as well as reside in a participating market,” according to FBN.

“JPMorgan Chase also expanded its grant program in February 2021 to offer $5,000 for closing costs and down payments to homebuyers purchasing homes in predominantly minority neighborhoods.”

Citi Bank is reportedly also jumping on the bandwagon:

There’s just one problem. This is the same pattern that preceded the 2008 housing crisis. Indeed, Yahoo News notes that the crisis “was heavily driven by risky loans to unqualified buyers.” These loans were known as “subprime.”

“It’s likely that at least some of the borrowers under Bank of America’s new program would be considered ‘subprime’ under ordinary lending rules — recalling the ugliest days of the 2008 crisis and supplying critics with easy talking points. Credit agency Experian, for instance, considers borrowers with credit scores between 580 and 669 as subprime,” according to Yahoo News.

“And while credit scores aren’t always an accurate barometer of a buyer’s purchase power or ability to make timely payments, advocates worry the interest rates required to make up for the low bar the lender is setting could set minority buyers up for failure.”

Not to mention setting the economy up for failure again as well, according to a large number of critics:

However, some say there’s a difference between what happened in 2008 and what’s occurring now.

Axios claims, for example, that Bank of America’s “zero down payment” promise is a misnomer and that the bank actually requires a down payment. The catch is that BoA “is offering grants of as much as $15,000 to cover it.”

“So buyers don’t have to come up with the down payment, but they are not borrowing the entire cost of the home, and they wind up holding some measure of equity right off the bat. That’s distinct from the zero-down loans that, along with questionable underwriting standards, helped make such a mess in the run-up to the Great Recession,” according to Axios.

But critics also argue that what BoA and other banks are doing is a form of “predatory lending” that could wind up hurting their customers, especially if the housing market crashes as some expect it indeed will.

“[R]esearchers at Goldman Sachs … now forecast[] that activity in the U.S. housing market will end 2022 down across the board. The firm projects sharp declines this year in new home sales (22% drop), existing home sales (17% drop), and housing GDP (8.9% drop),” Fortune magazine reported last month.

“And don’t expect relief in 2023. Goldman Sachs projects further declines next year in new home sales (another 8% drop), existing home sales (another 14% drop), and housing GDP (another 9.2% drop).”

The worry is that consumers will obtain a mortgage for a house worth, say, $300,000, and then wind up a couple years later with a house worth only half as much. Yet they’ll still be stuck with their $300,000 mortgage. See the problem?

Vivek Saxena
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