Raise your hand if you got burned by real estate in 2008. You can’t see it, but I’m raising my hands, feet, and even the hairs on my neck.
United Wholesale Mortgage (UWM) recently made news by launching a 0%-down mortgage program. And it reminds many real estate analysts of the subprime mortgage frenzy that helped fuel the market collapse back in 2008.
So, as you scope out the new program, what’s the potential impact on real estate investors?
A Summary of UWM’s 0%-Down Program
First, let’s start with the facts. The program allows lower-income first-time borrowers—those earning a household income below 80% of the local median household income—to borrow up to 97% of the purchase price. The remaining 3%, or what would ordinarily be the down payment, UWM covers with an interest-free second mortgage.
Borrowers don’t make monthly payments against the second mortgage. When they sell or refinance the property, they must repay both the first and second mortgages in full.
This sounds like an awesome deal for the borrower. All things being equal, I’d take that deal as a borrower. Who doesn’t love interest-free financing?
What About House Hacking?
The first thought that popped into my head when BiggerPockets asked me for my thoughts on how this loan program might impact investors was, “Wow, that’d be great for house hacking.”
If you could buy a duplex, triplex, or fourplex with no money down and have it cash flow enough to cover your mortgage payment, you immediately step into free housing and a property that appreciates over time. And your mortgage payment stays fixed even as rents rise year after year, growing your cash flow over time.
After a year of living in the property to fulfill the owner occupancy requirements, you could then use the money you saved on housing payments to buy another multifamily to house hack. You couldn’t use the UWM program a second time, but you could use Fannie Mae’s or Freddie Mac’s 3% down program or put down 3.5% on an FHA loan. And you would no longer be confined by the income limit at that point.
Even so, that income limit would disqualify many, even most would-be house hackers. Food for thought.
Risks and Impacts of 0% Down Mortgage Programs
I see a few risks with these kinds of programs, as well as their impacts on a few different groups. Here’s a look at them.
Risk of inflated home prices and bubbles
For many would-be homeowners, the down payment creates the main barrier to entry. Remove that barrier, and you suddenly have an influx of new buyers on the market. This drives up home prices and adds to the possibility of a housing bubble.
All market bubbles burst sooner or later. And it wouldn’t even require a bubble or a housing market correction to put a lot of homeowners underwater.
Risk of underwater homes
In this case, home prices dipping even 3% would put these homeowners underwater on their mortgage. And that says nothing of all the closing costs involved in selling a home.
They would be unable to sell, at least not without coming out of pocket with tens of thousands of dollars of their own money. This seems awfully unlikely for the low-income borrowers this program is designed to serve.
That sets the stage for strategic defaults and foreclosures—or, at the very least, short sales negotiated with lenders. These lenders may struggle to accommodate them in a down market.
Risk of credit crunches and lender failures
If too many loans default or require short sales, lenders go into crisis mode. They tighten their lending standards or stop lending altogether.
Some may even fold. We saw two regional banks fail in early 2023 due to commercial real estate exposure and far tighter lending standards in the industry after that.
Finally, these loans get packaged and sold as securities. So, who ultimately takes many of the losses on them? You, me, pension funds, and other retail investors who have money tied up in these publicly traded funds and securities.
Impact on note and debt investors
Over the last two years, secured notes and debts have actually performed pretty well. We’ve seen strong returns on the ones we’ve gone in on together in our passive real estate investment club at SparkRental.
But imagine a housing bubble forms, or at the very least, the market dips by 5% to 10% nationwide. Hard money lenders, private debt funds, and others offering secured debts will see their non-performing loans skyrocket and, therefore, their losses. That would be bad news for people like me who invest passively in debts secured by real estate.
Impact on private equity real estate investors
In our Co-Investing Club, we primarily go in on real estate syndications together.
A 2008-style housing-induced recession would drive up unemployment, which would, in turn, drive up rent defaults, evictions, and household bundling—all bad news.
One mitigating factor, if you want to call it that, is that some homeowners would become renters again, fueling demand for rental housing. But that’s cold comfort for everyone involved.
On the other end of the possibility spectrum, let’s say the program does exactly what it aims to do: put homeownership within reach for millions of renters. They all leave the pool of renters and become homeowners, crushing demand for rental housing.
That’s hardly good news for passive investors in multifamily real estate syndications.
Activists Want It Both Ways
We’ve all heard housing activists demand better access to homeownership for low-income families. I’m not opposed to that. I can’t think of anyone who is.
But here’s the problem: Read any article about the launch of UWM’s 0%-down loan program, and you’ll see quotes from those same housing activists warning about “setting buyers up for failure,” or “ticking time bombs,” or “the subprime nightmare all over again.”
Guess what? Subprime mortgages were created at the request of those same housing activists, who demanded more credit accessibility for low-income borrowers. They wanted fewer barriers to entry.
Those barriers to entry keep the system stable. They ensure a minimum level of financial security among borrowers.
So which is it? Do you want homeownership more accessible, or less? You can’t have it both ways.
What About Investors?
As for real estate investors, just keep an eye on real estate market fundamentals. Watch out for frothiness. And when in doubt, invest more conservatively. Our No. 1 goal when we look at deals today as an investment club is protecting against downside risks.
We like investments that can weather some choppiness in the market—and you should, too.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
