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Many Americans would love to buy a home, but don’t have tens of thousands of dollars for a down payment.

This major roadblock is being removed by a new zero percent loan program launched two weeks ago by one of the nation’s largest lenders.

However, the new program, offered by United Wholesale Mortgage, makes some experts worry about how these loans can restore homeowners – especially if home prices stop going to the moon. And for some, it brings back bad memories of the subprime mortgage meltdown that caused the 2008 financial crisis.

UWM, led by Mat Ishbia, the billionaire owner of the Phoenix Suns NBA team, said qualified home buyers would not have to make a down payment.

Instead, the program will allow buyers to pay 97% of the home’s value with a first mortgage and provide the remaining 3% (up to $15,000) in the form of a second mortgage.

That second loan will not earn interest, but will need to be paid off – in full as a balloon payment – when the home is sold, the mortgage is paid off or if the homeowner refinances.

‘Demand has been overwhelming’

These home loans are only open to first-time home buyers and those who do not earn more than 80% of the income in the area.

The initial demand was huge. We already have several thousand loans sent out,” Alex Elezaj, UWM’s chief policy officer, told CNN.

UWM said that no other loan company or non-banking company offers such a program nationwide. (UWM is a lender that connects homebuyers with mortgage brokers through its Mortgage Matchup platform. Earlier this month, Mortgage Matchup was named the first partner of the NBA and WNBA.)

However, some are concerned that this type of mortgage could cause problems for homeowners down the line.

The biggest risk is that because they don’t provide a down payment, homeowners will be starting out with no equity.

That means they will find themselves immediately underwater (due to more money than the home is worth) if the hot housing market suddenly recovers and home values ​​drop. come down

That can be a problem if the homeowner needs to sell quickly, perhaps because they lose their job, face financial problems or need to move.

In no time, they would be in line to pay that second bill. And since they are underwater, the sale of the home will not generate enough cash to pay off the debt.

Patricia McCoy, a professor at Boston College Law School, said: “If a homeowner doesn’t have enough money to make up the difference, they will be unable to pay off the second mortgage and be at risk of foreclosure and breakdown.

This situation is “exactly what happened during the subprime crisis, when millions of homeowners were underwater behind their mortgages and went bankrupt,” he said. McCoy, former credit commissioner at the Consumer Financial Protection Bureau (CFPB). “It’s happened before and it can happen again.”

The housing bubble that popped around 2006 was fueled in part by the explosion of loans to subprime lenders. In the years leading up to the bubble, lenders came up with new products such as adjustable rate mortgages and low down payment mortgages that ended up collapsing when home prices finally collapsed.

In fact, the housing market is on fire right now. Home prices are so high and demand is so strong that some homes are selling above asking price after all bidding wars.

However, one potential problem is that homeowners may find themselves locked into higher mortgage rates if The Federal Reserve begins to cut interest rates.

That’s because in order to refinance at a lower rate, the homeowner would need to pay off the second mortgage in full. And they probably don’t have enough money to do that.

They may also stick to higher rates because lenders won’t allow a borrower to upgrade if they haven’t built enough equity in the home.

There are other options for zero-down loans. For example, Bank of America announced a low-down payment loan program in 2022 for first-time homebuyers in some Black and Hispanic neighborhoods.

As Bankrate notes, there are also low-cost home loans backed by the US Department of Agriculture (USDA) in rural areas as well as loans for veterans and surviving spouses guaranteed by the Department of US Department of Veterans Affairs (VA).

Anneliese Lederer, senior policy advisor at the Center for Responsible Lending, said it’s important for homeowners considering the UWM loan program to be educated on the terms and conditions.

“Using catchy lines like ‘pay as you go’ sounds fun and exciting. But you need to read the fine print,” Lederer said. “This would be a great product to allow people who can afford a mortgage but don’t have a down payment to get into homeownership. But the question is: How do you pay off that second mortgage? What’s the purpose? Now if there is a plan.”

Dennis Kelleher, CEO of Better Markets, a nonprofit that advocates for stronger financial regulation, told CNN he worries that a product like this will hurt borrowers if the housing market stumbles.

“These loans are going to be ticking time bombs – just like subprime mortgages – unless housing prices continue to increase significantly,” Kelleher said. “This has the potential to instantly turn the American dream of homeownership into a nightmare.”

Kelleher noted that although home prices are rising significantly now, there is no guarantee that they will continue.

Existing home prices rose another 6% last month to $407,600 – the highest April median price on record.

“We don’t know if we’re in a bubble that’s going to burst or if trends are going to increase,” Kelleher said. “But pushing 100% mortgage products on low-income people when house prices are so high should cause everyone to be very concerned.”

Jonathan Adams, an assistant professor at Saint Joseph’s University who teaches real estate finance, said the UWM loan program has “all the elements that made subprime bad.”

UWM pushed back on these concerns, noting that lenders still have to adhere to strict underwriting standards.

“People making these claims are not educated on the current state of the industry,” said Elezaj, the UWM director. “In today’s environment, UWM is responsible for underwriting the loan, which gives us confidence that these loans are of high quality.”

“This is a great thing. It’s helping consumers and it’s a big win all around,” Elezaj said. or $15,000 for the down payment. This eliminates that. ”

It is also important to note that others experts say lending standards have improved significantly since the 2008 financial crisis.

The days of NINJA loans (no cash, no job, no property) and adjustable rate loans are gone.

“We’re not going back to 2006 here,” said Greg McBride, chief financial officer at Bankrate. “Lending standards are light years removed from the pre-crisis ​​​​​​​​​when there were often no standards at all.”

However, Adams, a former Wall Street analyst, warned that a person who cannot pay and makes less than 80% of income (qualifies for this loan program ) may suffer more economically when local prices are higher. they fall.

“One of the lessons of the subprime crisis,” Adams said, “was that you don’t help borrowers by making it too easy to borrow.”