The days of zero-down mortgages, which helped to fuel the real estate boom, are coming to an end in Michigan. The mortgages helped many buyers who lacked savings become homeowners in the past few years, but zero-down mortgages now are seen as a risky lending practice as defaults rise and housing prices fall.
The change means thousands of "for sale" signs in metro Detroit aren't going to disappear anytime soon as tougher loan qualification requirements reduce the pool of potential buyers, leading to further erosion of home prices.
Iraq war veteran Kelly J. Shannon Jr., 24, said he and his wife had been renting a townhouse for three years. The huge array of homes at falling prices was motivation.
"It was like a candy store, and we could pick out anything we wanted," he said.
The Shannons ended up getting their first home in Westland for $34,000 off the original listing price of $162,900.
They were set to close Feb. 15 on their 1,190-square-foot house across the street from an elementary school. But their broker at Citizens First Mortgage called last week and said if they didn't close by Jan. 31, they would lose the zero-down option.
The rush to close on zero-down deals is the result of a letter that mortgage backer Fannie Mae sent to lenders in December reiterating its rule that requires a minimum 5% down payment on homes sold in declining markets.
Many counties in Michigan and other states are considered declining markets by mortgage companies and banks. That means mortgage brokers cannot sell the zero-down loans to Fannie Mae and Freddie Mac, the two largest backers of home mortgages in the United States. They buy home loans from lenders and banks and sell them as securities on Wall Street.
Foreclosures in Michigan rose 68% in 2007, fueling the nation's third-highest foreclosure rate last year.
"It has essentially wiped out most of our zero-down products for people buying conventional mortgages," said Greg Pompura, president of Elk Financial in Southfield. "It is a battle every day to try and finagle a loan for people."
Where Michigan stands
Since the subprime-mortgage bust last year, Fannie Mae and Freddie Mac are among the few remaining buyers for loans that banks and mortgage companies write. If a loan doesn't conform to the companies' standards, banks must carry it on their books, which few banks prefer to do.
Troy-based Flagstar Bank lists 20 Michigan counties, including Wayne, Oakland and Macomb, as declining. CitiMortgage lists nine Michigan counties as declining as of Jan. 18.
"I don't know of anyone who is not enforcing a declining-market policy right now," said Linda Terrasi, senior vice president of Flagstar. "What you are going to find is like the olden days, where you will need to have 5% down."
The declining-market rule doesn't apply to Federal Housing Administration, or FHA, loans, so people still can try for zero-down mortgages if they can obtain seller concessions, mortgage experts say.
There are other things potential buyers can do to buy a home with little or no money down, Terrasi said. FHA still requires 3% down, including some closing costs, but there are ways to work around that.
And if you are planning to buy a foreclosed home from the U.S. Department of Housing and Urban Development, also known as a HUD home, FHA offers a $100-down program in Michigan with $2,500 to go toward repairs. It must be an owner-occupied home, a rule that blocks investor purchases, she said. Congress is considering lowering down payment requirements on FHA loans and raising the loan limits.
Bob Walters, chief economist for Quicken Loans in Livonia, said consumers should talk to lenders before counting out a zero-down mortgage. People with credit scores below 640 would face the biggest challenges, he said.
"The opportunities have been diminished, but they are not completely gone," Walters said. "We are seeing a lot less people buying homes with no money down. I can't put a percentage on that, but it is significant."
Brad German, spokesman for Freddie Mac, said reminding lenders of the policy was in response to the deteriorating credit market and increased risk in the mortgage market.
"This has been a longstanding policy, but it is now having more of an impact because more markets have seen prices declining," German said.
Skittish lenders don't want to make a loan on a property whose value might fall in a matter of months, leaving the homeowner owing more than the home is worth.
Since January, banks have reported $146 billion in losses on U.S. mortgage securities, Bloomberg News says.
About 55% of banks had tightened their lending standards for home mortgages in January, up from 40% in October, according to a Federal Reserve Bank survey released Monday.
"Lenders got pretty loose with their money in the past couple of years. They are retightening their standards," said John Mechem, spokesman for the Mortgage Bankers Association. "No down ... is going to be a very difficult loan to obtain in the future, if it ever comes back. There is not a lot of appetite for that kind of risk right now."
Real estate agents and mortgage brokers bemoan the tighter lending practices at a time when home prices have fallen to open the market for first-time buyers. They are struggling to find buyers for the thousands of foreclosed homes on the market, especially with the large inventories of owner-occupied and new homes for sale.
"I think it's an overcorrection to get rid of zero-down mortgages. Now the pendulum is swinging too far the other way," said Drew Sygit, a certified mortgage and equity planner for Meadowbrook Mortgage in Bloomfield Hills.
"We are missing an opportunity to slow down the depreciation we are facing. You have a lot of people who would buy right now because the prices are declining," he said. "They know it's a great time to buy, but they don't have the money."