No Money Down!

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Despite everything we've learned about the importance of down payments to home buyers repaying their loans, no money down mortgages continue to be made. In today's Wall Street Journal, Nick Timiraos describes how the no money down mortgages survive because sellers and some lenders have found a way to game the system.
Here's how it works. To get a loan backed by the Federal Housing Administration, home buyers are required to put down at least 3% of the purchase price. Sellers and some private lenders have found a way around this system by forming non-profit organizations that fund the minimum down-payment. In effect, sellers are taking a 3% haircut in order to allow buyers to get a subsidized loan.
The problem is that these non-profit buyers haven't really put down any equity, making them far more likely to default. Lenders modeling likely default rates based on downpayments will underestimate the likelihood of these loans defaulting. In short, lenders may be in for a lot more pain than they expect.
One scary implication: our already devastated housing market may actually be artificially inflated by these no money down loans. That is, without this subterfuge prices would be even lower.

U.S.-Backed Mortgage Program Fuels Risks
[Wall Street Journal]

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