Who says lenders need to charge you a cash down payment when you take out a mortgage in this era of hyper-strict underwriting? Just about everybody. But hold on. Two prominent federally chartered credit unions beg to differ with this consensus opinion.
The biggest sources of home loan money — Fannie Mae and Freddie Mac — won’t fund a loan without a down payment. Even then, if your down payment is less than 20 percent, they require private mortgage insurance.
Federal banking regulatory agencies have proposed — but have not yet finally adopted — a regulation requiring a 20 percent minimum down payment as the new standard for safe lending and best pricing.
Congressional critics complain that the Federal Housing Administration’s current 3.5 percent minimum is part of the reason the agency is now in financial hot water. They want 5 percent down at least.
Financial analysts and mortgage industry experts argue that requiring some amount of “skin in the game” is essential to provide borrowers a stake in the transaction.
But the two credit unions have quietly been running what they consider to be successful, carefully administered zero-down-payment programs for borrowers for much of the past two years, and are seeing almost no defaults or foreclosures.
The giant Navy Federal Credit Union, the largest credit union in the country with 4 million members, offers a zero-down option for qualified home purchasers coast to coast with no mortgage insurance. On top of that, it allows “seller concessions” — contributions by sellers of homes to defray buyers’ closing costs — as high as 6 percent of the home price.
The maximum loan amount is $1 million, but typical loans are in the $200,000 range. The program is targeted especially at first-time purchasers since they often are short on down-payment cash but may otherwise be creditworthy. Navy Federal says it has closed $740 million of these zero-down mortgages in the last 12 months alone. The credit union retains all loans in its investment portfolio and services them on its own.
As you might guess, there are some key qualifications: You have to be a member of the credit union or an immediate relative of a member. Members include all branches of the military, active and retired, along with defense-related contractors. The credit union estimates the total potential reach of eligibility nationwide is 12 million people. You need to pass underwriting muster in terms of income and reserves, and you need moderately good — not perfect — credit scores. Delinquencies on the program to date: well under 1 percent, according to Katie Miller, vice president for mortgage products.
Meanwhile, NASA Federal Credit Union has started marketing its own version of zero down. It is currently restricting loans to qualified members buying homes in the Washington, D.C., metropolitan area but could expand to other areas in the future, depending on local housing market conditions. Maximum loan amount is $650,000. Seller concessions are capped at 3 percent. Underwriting is rigorous and preferred FICO credit scores start in the mid-700s. Delinquencies over the past year and a half: zero, according to Bill White, NASA Federal’s vice president for real estate lending. Foreclosures: zero.
So what’s the significance of these two programs for the current debates underway on Capitol Hill and among banking regulators on the subject? Should the government mandate 20 percent down for everybody? 10 percent? Should zero down ever be permissible?
Tom Lawler, head of Lawler Economic and Housing Consulting, says that as a general matter, “zero down payment is just bad public policy.”
Frank Nothaft, chief economist for giant investor Freddie Mac, maintains that “the more equity [cash up front] you have, the better” the loan is likely to perform.
Both Lawler and Nothaft agree, however, that with strict underwriting at application combined with intensive servicing — getting in touch with borrowers at the first hint of trouble and working with them — zero-down loans can perform well in healthy housing markets.
The Department of Veterans Affairs has offered zero-down loans for years yet has a lower default rate than FHA, which requires 3.5 percent. Though the Navy Federal and NASA Federal programs are relatively young, their minimal delinquencies to date could have an important message for regulators: The size of the down payment is just one piece of the puzzle. Smart underwriting and hair-trigger servicing that intervenes with solutions when borrowers hit rough patches may be just as important.
Kenneth R. Harney is a syndicated real estate columnist.