The Jabberwocky from Lewis Carol’s Alice in Wonderland terrified me as a kid, but honestly, the entire story terrified me. This poor little girl falling down this rabbit hole and going into an alternate dimension… not my cup of tea when I was 5 years old. The lasting appeal of the story, however, comes from the portrayal of falling for the same mistake over and over again and dealing with the underworld that exists when we willingly deny reality. This is the exact story I thought about when I recently heard of certain national lenders rolling out a zero down mortgage program, again.
The theory is as it always has been: zero down to help get the ball rolling with a home buyer and then the buyer can refinance later after building equity to a more conventional loan. It has always sounded like a great idea because generating the initial down payment remains the greatest roadblock to homeownership for most. If we could just get past that initial problem, the argument goes, people could start building equity and we could help those with less generate more. The sentiment is in the right place, but going down this rabbit hole is not without its risks.
First, people who have less equity to start have less skin in the game when things go south. During the 2008 crash, people who had purchased property with zero down saw their houses go underwater almost instantly. This did very little for their allegiance to their new home, and when relatives and friends told them to walk because, “they would never see their value return,” people just got up and walked. With no skin in the game, there’s no reason to hold steady when the inevitable turbulence hits.
Second, zero down deals inflate the market for the people who are diligently saving. Down payments are not easy to generate, and when people can jump past that crucial step, you start increasing the interest in the already limited stock of housing, causing prices to rise further. This doesn’t change much for the zero down home buyer, but it does make it harder for others who are trying to accumulate a down payment.
Finally, if there was a way for banks to reliably qualify people for a home without the classic metrics, they would have done it already. Banks make money from lending. That’s all they want to do: lend, lend, lend. They do, however, need to find people that will pay them back. If doing zero down deals produced reliable, credit worthy homebuyers, banks would be offering these programs everywhere, but they’re not. No matter how you cut it, zero down deals are much riskier for the lenders and home buyers all around.
I believe in the United States and greatly value upward mobility, but we must always engage in programs to bolster upward mobility responsibly. Setting up borrowers and banks alike to engage in riskier practices does very little good when all is said and done. This is a rabbit hole we’ve been down before, and I’m not looking forward to seeing what comes out of the underworld this time.
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