Zillow’s 1% Down Loan Program Will DESTROY The Housing Market (or not…)

    How Strippers Bought Houses

    In the famous movie The Big Short, there was a scene in which a stripper bought multiple investment condos. She was able to do so because there were subprime loans available in the early 2000s that required: (1) no income verification; (2) only a 680 credit score; (3) NO DOWN PAYMENT; and (4) no owner-occupancy. (I still remember when SunTrust Bank announced this loan program with much fanfare, and how it depressed all of us with a modicum of common sense.)

    So, strippers could speculate in investment condos with no income and no money out of pocket – effectively getting free “put” options. If condo prices went up – woohoo! Strippers got rich! If condo prices went down – darn! Strippers walked and lost very little.

    What could go wrong? Well, we know the answer…

    Economy Was a Mortgage Broker/Stripper Doom Loop

    What is even more amusing is that those strippers probably really were making very good money, as the same mortgage brokers who gave them loans were also spending inordinate amounts of time in those same strip bars, tipping strippers with the money they made providing mortgages for strippers…

    So, 30% of our economy consisted of strippers and mortgage brokers making money off of each other – via bad mortgages and condo speculation. 😊

    But I digress. Again.

    Zillow Announces 1% Down!

    Last week, Zillow announced its 1% down loan program, and the internet went wild with comments about how this is a return to the worst excesses of the subprime mortgage days.

    I encourage readers to skim the comments below the Yahoo article I linked to in the previous sentence; you’d think we are on the verge of mortgage Armageddon.

    But – alas, we’re not. And here’s why.

    1. Buyers need to actually verify income! Yep, it’s true. Unlike in 2005, today’s buyers need to verify income with a real job and real tax returns. This aspect alone makes the program night and day different from subprime stupidity.
    2. Strict income limits/bottom end of the housing market only. Borrowers cannot have incomes that exceed 80% of the median income for the area. This severely limits the number of buyers who qualify, and ensures the program will only impact the very bottom end of the housing market. There are few markets in California, for example, where this program would ever work.
    3. Rocket and UWM already offered this with marginal success. UWM released a similar 1% down program in April and Rocket followed suit in May. And neither has lit up the world with their programs, given the limitations.
    4. Glorified HomeReady (Fannie Mae)/Home Possible (Freddie Mac) programs. These 1% down offerings are really just glorified programs that Fannie and Freddie have offered for years, but with lender credits that lessen the effective down payments. So, once again, there is really nothing new under the sun.

    What the Doomsayers Do Get Right

    There is one thing that the doomsayers do get right. Very small down payments definitely do foster more foreclosure risk.

    After the 2008 mortgage meltdown, many people walked away from their mortgages because they were upside down with negative equity and NOT because their payments were too high. The unaffordability myth was something the media and politicians put forth for clicks and to further impugn those “evil bankers” (to shift blame away from the politicians). To be sure, there were many people who could not afford their payments, but it was not because they adjusted upwards – and if values had continued to rise, they very likely would have found a way to keep their homes.

    But, given that economists expect housing to “appreciate 18% over the next 5 years” (per the MBS Highway today), I think it is unlikely that our 1% down buyers will walk. This is particularly the case when the bottom end of the housing market is expected to appreciate the most, given the shortages.

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