No-money-down mortgages are back
Some affluent buyers are getting the keys to their new home without putting a penny down.
It’s 100% financing—the same strategy that pushed many homeowners into foreclosure during the housing bust. Banks say these loans are safer: They’re almost exclusively being offered to clients with sizable assets, and they often require two forms of collateral—the house and a portion of the client’s investment portfolio in lieu of a traditional cash down payment.
In most cases, borrowers end up with one loan and one monthly payment. Depending on the lender and the borrower, roughly 60% to 80% of the loan can be pegged to the home’s value while the remaining 20% to 40% can be secured by investments. On a $2 million primary residence, for instance, the borrower could get a $2 million loan, which would require a pledge of assets in an investment portfolio to cover what could have been, say, a $500,000 down payment. The pledged assets can remain fully invested, earning returns as normal, without disrupting the client’s investment goals.
While these affluent clients may be flush with cash, this strategy allows them to get into a home without tying up funds or making withdrawals from interest-earning accounts. And given the market’s gains combined with low borrowing rates in recent years, some banks say clients are pursuing 100% financing as an arbitrage play—where the return on their investments is bigger than the rate they pay on the loan, which can be as low as 2.5%. Some institutions offer only adjustable rates with these loans, which could become more expensive if rates rise. In most cases, the investment account must be held by the same institution that’s providing the loan.
“No fair!” I can hear the Congressional Black and Hispanic Cauci whining right now. These aren’t really “no down payment” mortgages, these are “no money down” mortgages. Big difference. But they won’t result in “deprived minorities” getting to buy houses.
But still, I don’t approve.
Because it means that quantitative easing is going to have to continue to keep the investments and securities markets’ indexes high, so that the investments and securities necessary to sling as a quasi-down payment at least hold their “value” over the life of the mortgage, and of course everyone else will have to bear the cost vicariously with everything we buy. And if some banks are only offering these kinds of loans as ARMs and never fixed rates, this means that governments’ iron-fist manipulation of both the interest rate market to keep interest rates low to make it cheap for governments to borrow money (e.g. LIBOR), and also the current normal good-inferior good jiggering around with the CPI (to keep it as low as possible to keep Social Security COLAs as low as possible and to keep the income tax bracket boundaries from soaring too much from year to year to keep income tax revenue high enough) better keep on going for a long time.
This is going to go splat some how some way, maybe sooner than we think. I bet RJP already knows the answer.
Until he provides it for us…five, six, seven, eight…the extended club mix at that: