Housing Wire reports Flagstar rolls out zero-down mortgage with closing cost aid for low-income borrowers.
Flagstar Bank is targeting low- to moderate-income borrowers with a mortgage offer that’s seemingly too good to be true.The program, which Flagstar introduced earlier this week, requires no down payment from the borrower and also provides the borrower with closing cost assistance.Under the program, Flagstar will gift the required 3% down payment to the borrower, plus up to $3,500 to be used for closing costs.
Free Money Gift
I think we tried this kind of thing before with unpleasant results.
Home prices were very cheap in 2009 and 2010. Now homes are expensive, but now a bank comes up with a free money scheme to make homes affordable.This is a typical action that one sees at the end of every cycle.
Free down payments. What can possibly go wrong?
Mike “Mish” Shedlock
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The whole problem is that mortgages can’t ever work. Banks tried it in the 1930’s, and when depositors stood at the window demanding their money, they learned that loaning money long term that they borrowed (from depositors) short term was a bad idea. Savings and loans took a crack at it, and lent out lots of money at 6% in the 60’s, which was all good at the time, what with Regulation Q in effect capping the interest rates they could pay. All was fine until stagflation appeared in the 70’s, and then come the 80s, they were paying 12 to 15% (I personally was collecting 14.75% from an S&L on a five year CD) to get the money they had loaned out at 6%, and the entire savings and loan industry was wiped out, save a few that were able to grow fast enough that their new loans at high rates dwarfed the old 5-6% loans. That didn’t work, either, so another new idea was tried, repackaging and reselling the loans on Wall Street, but… that had a new problem. Now the institution making the loan decision wasn’t at risk in case of default. Making money issuing loans became all about volume, and not at all about quality. Not surprisingly there was a boom in fudged applications with exaggerated incomes and appraisals that were exaggerated as well. In time the house of cards came down, but in all the finger pointing at Wall Street, the core problem was never addressed, and the identical problem remains today. The originator is not the person who will carry the risk because he will resell the loan. Since nothing has been changed, the problems will eventually return. Now, back to the article above – since the bank will resell the loans, nothing can go wrong, at least for the bank. Once it sells the loans, it has no risk, so there is no reason it shouldn’t come up with programs like this.
I am a firm believer in paying no closing costs. It makes for easier refinancing. Once interest rates finally do bottom, then the final refinance can benefit from the lower rate.
There have been “negative points” loans to pay all your closing costs for forever. It just means you pay a higher interest rate. I imagine with the “gift” on top borrowers will be paying an even higher interest rate.
The ultimate problem is that the U.S. Federal Reserve never saw a loan that it didn’t like. The Fed incentives the uncontrolled expansion of debt because it gooses GDP in the short term. But every loan issued pulls demand forward at the cost of reduced future economic activity. This will not end well, just like all the times before.
Did I mention seeing billboards advertising classes on how to flip homes and get rich? I did see at least one.