Low Downpayment Mortgages Increasing Market Risk

HACKETTSTOWN, N.J. – Low and no-downpayment mortgages have allowed many consumers who otherwise may not have been able to afford to purchase a home, to become homeowners. But those same opportunities may be increasing consumers’ exposure to the risk of possibly losing their home. Results of a recently released study by SMR Research, which studies mortgage industry trends, show new home buyers own less of their home than ever before. In the first six months of 2005, 38.1% of homebuyers who financed their homes made a down payment of 5% or less of the purchase price of the home. That’s up from 30.6% in 2000. In addition, the percentage of buyers who paid the traditional 20% downpayment fell to 33.7% of borrowers, down from 39.1% in 2000. Exacerbating the situation, says SMR, is the fact that few of these buyers pay for primary mortgage insurance which lenders typically require when home buyers put down less than 20% on the loan. Instead, SMR says these buyers are using so-called piggyback mortgages that include a regular mortgage that covers the first 80% of the home cost, and a home equity loan or line of credit which pays for the rest. According to SMR, piggyback loans account for nearly half – 48.2% – of all home purchase mortgage dollars. That’s up from 19.9% just four years ago. This behavior, says SMR, is making the real estate market “increasingly risky” because “lack of home equity gives people one less asset to fall back on in times of need.” The company warns if housing prices flatten out or decline, some new homeowners who have built up little equity in their homes, could find themselves upside down on their loans, owing more than their house is worth. Additionally, if interest rates rise, homeowners who financed their home purchases using adjustable rate mortgages may not be able to maintain the higher payments and may have to sell the house for what they paid. “Foreclosures could spike and the supply of homes for sale soar. That could send the real estate market into a tumble,” SMR cautions. -