It's well-known that zero-down mortgages made to borrowers with subprime credit scores was a big contributing factor to the financial crisis. Well, it looks like they may be back -- at least in some form.
In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel take a look at the new mortgage products hitting the market, why they aren't quite the same as the loans that contributed to the crisis, and why it's important to pay attention to what comes next.
A full transcript follows the video.
This video was recorded on Oct. 15, 2018.
Jason Moser: I wanted to follow up our discussion on banks with this article I was reading last week. You and I did a double take, we both saw this. Thousands Line Up for Zero Down Payment Subprime Mortgages. And I thought when I read this initially, "Wait, this has to be referring to something that happened in the past that's not going to happen again." But sure as shooting, this is a situation where borrowers are now getting the opportunity to line up to get, basically, zero down payment mortgage for a house.
On the one hand, I love the fact that we have an economy that can give people a chance like this. On the other hand, these are not borrowers with really good credit scores. With no skin in the game and a bad credit score to begin with, especially in an environment where, apparently, the FICO score is as high as it's ever been for most, I don't know that this is really a good idea. What do you think about this?
Matt Frankel: From both an investor's perspective and a financial planner's perspective, I always say that there are three things that you need to have in an ideal mortgage candidate. You need proof that you can pay it back --good income, stable employment, things like that. You need a strong credit history. And, you need a down payment. You need to have skin in the game. In the past, I've said that if you're missing one of those, it's not terribly troubling. For example, if you have low credit but you're putting 20% down and you have a great job, it could certainly make sense to give you the loan. When you're missing more than one of those things, like in the mortgages that are starting to pop up now, no down payment and no strong credit history, that's when I start to worry a little bit. During the financial crisis, we saw people who got mortgages without having all three. Those aren't coming back just yet, but this is definitely not a step in the direction I want to see.
It is worth mentioning that these are primary residence only homes. These are not investment mortgages. That's also a big distinction of what we saw leading up to the financial crisis. But even so, borrowers lacking two of the three major components that you should have when you get a mortgage, that's kind of troubling to me.
Moser: I should say, too, it does appear that the financial institution that's backing this up, there is an education component here that is required. And I applaud that, I think it's good. I'm just not quite sold on the idea. But perhaps this is a small test, they look at this as something that might be worth expanding in the future. They'll use some of the data and the learnings from this and that'll help dictate, perhaps, what they do in the future. Just a bit of an eye-catcher. One way or the other, we'll learn more here in the coming years as to whether it works out or not.