The real impact of a 0% down mortgage and how investors can use it… or not

Raise your hand if you were burned by real estate in 2008.

United Wholesale Mortgage (UWM) has been in the news lately Launch of 0% down payment mortgage loan program. It reminds many real estate analysts of the subprime mortgage frenzy that led to the market crash Back in 2008.

So when you look at the new scheme, what are the potential implications for property investors?

UWM 0% Down Payment Program Summary

First, let’s start with the facts. The program allows low-income first-time borrowers (those with household incomes below 80% of the local median household income) to borrow up to 97% of the purchase price. this The remaining 3%, or the usual down payment, UWM cover Have an interest-free second mortgage.

The borrower has no monthly payments on a second mortgage. When they sell the property or refinance, they must repay Both Full amount of first and second mortgages.

this sounds like a great Closing deals for borrowers. All things being equal, I would accept this deal as a borrower. Who doesn’t love interest-free financing?

What about house hacking?

this the first thought that came to my mind When BiggerPockets asked me for my thoughts on how the loan program might impact investors It’s, “Wow, that’s great. burglary”.

if you can buy one duplexthree or four floors, no down payment and with it cash flow Enough to cover your mortgage, you get immediate access to free housing and a property that appreciates in value over time. Your mortgage payment stays the same even if rent increases Year by yearincreasing your cash flow over time.

After living in the property for one year to meet owner occupancy requirements, you can Then Use the money you save on your home payment to buy another home multi-family housing Hack. You can’t use the UWM program again, but you can use Fannie Mae or Freddie Mac’s 3% down payment program or the 3.5% down payment on an FHA loan. You will then no longer be subject to income limits.

Even so, income limits disqualify many, and even most, would-be house hackers. food For thinking.

Risks and Implications of 0% Down Mortgage Programs

I see some risks with such plans and the impact they have on some different groups. Take a look at them below.

Rising house prices and the risk of bubbles

For many people who want to buy a house down payment creating a major barrier to entry. Remove this barrier and there will be a sudden influx of new buyers in the market. this push up housing prices and add to possibility real estate bubble.

All market bubbles burst sooner or later. It doesn’t even require bubbles or real estate market adjustment put a lot The homeowner is underwater.

Risks of underwater homes

in this case, House prices even fell by 3% would put these homeowners underwater. mortgage. Then said nothing All closing costs involved in selling your home.

they will be Unable For sale, at least not for sale No Spending tens of thousands of dollars out of pocket with his own money. this seem Very For low-income borrowers, the program is unlikely to serve that purpose.

This sets the stage for strategic defaults and foreclosures, or at least short sales negotiated with lenders. It may be difficult for these lenders to adapt in a down market.

Risk of credit crunch and lender failure

if Too many loans are in default or require short saleslending institutions enter crisis mode. They tightened lending standards or stopped lending altogether.

Some may even fold. we saw two Regional bank failure In early 2023, due to commercial real estate Since then, the industry’s risk exposure and lending standards have become more stringent.

Eventually, the loans are packaged and sold as securities. So, who will bear most of the losses in the end? You, me, retirement funds, and other retail investors all put money into these publicly traded funds and securities.

Impact on Notes and Debt Investors

Over the past two years, secured notes and debt actually Pretty good performance. We’ve seen strong returns Went in Join our SparkRental passive real estate investing club.

But imagine a housing bubble forming, or at least a market drop of 5% to 10% across the country. Hard money lenders, private debt funds and others that offer secured debt will see a surge in bad loans, causing losses. This would be bad news for people like me who invest passively in real estate-secured debt.

Impact on private equity real estate investors

In our syndicated investment club, we primarily participate in real estate syndication together.

A 2008-style housing recession would drive up unemployment, which in turn will drive up rent arrears, evictions, and household bundling—all bad news.

a mitigating factor, if you want to That is, some homeowners will become renters again, stimulating demand for rental housing. But that was cold comfort for everyone involved.

At the other end of the spectrum of possibilities, suppose that the program does Exactly what is its purpose Do: Make homeownership possible for millions of renters. They all left the renter community and became homeowners, dampening demand for rental housing.

This is not good news for passive investors in multifamily housing real estate syndicate.

Activists want it both ways

We’ve all heard of housing activists demanding better access to homeownership for low-income families. I don’t object to this. I can’t think of anyone like that.

But here’s the thing: Read any article about UWM’s launch of its 0% down loan program and you’ll see quotes from these housing activists warning of “setting buyers up for failure” or a “ticking time bomb” or “the subprime nightmare happening again.”

Guess what? subprime mortgages be created At the behest of these housing activists are demands for more credit opportunities for low-income borrowers. They want to reduce barriers to entry.

These barriers to entry keep the system stable. They ensure a minimum level of financial security for borrowers.

So which one is it? Do you want to own a home? more accessible, or less? You can’t have the best of both worlds.

What about investors?

For real estate investors, just Pay close attention to real estate market fundamentals. watch Foam. and When in doubtinvesting more conservatively. As an investment club, when we look at trades today, our primary goal is to protect against downside risk.

We like investments that can withstand market fluctuations—and you should too.

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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.