Rich folks can do things regular people can’t. Like eat a banana split with Mountain Dew-flavored ice cream on their helicopter commute home. And land that chopper at a mansion they bought with no money down.
Right, no money down. For those rich enough, buying a home can be as easy as showing banks their money. All some buyers have to do is pledge part of their wealth as collateral, instead of coughing up a down payment.
Many buyers used no down payment loans during the housing boom to get homes they couldn't afford. That led to a wave of foreclosures. So it's reasonable to expect that 100 percent home financing would have died. And it has, for nearly all Americans. But no down payment loans are crawling out of the grave -- for the wealthy, at least.
It may sound a little silly for the well-heeled to skip a doable down payment and pay interest they don’t have to. But it’s actually an interesting gamble that has appeal for banks and buyers.
“Interest rates are historically low. At the same time, the stock market is doing really well,” says Stijn Van Nieuwerburgh, director of New York University’s Center for Real Estate Finance Research. “Some investors or some households are asking themselves, ‘How can I profit from these low interest rates?’”
Here’s how. Say wealthy buyers pay 3 percent interest on a mortgage. Because they don't have to make a down payment, they don’t have to divert money from investments, such as stocks. If those investments earn more than 3 percent, that difference is profit.
"If they’re clients who have a high enough net worth, maybe for them, that’s a good decision," says Chris Mayer, a real estate professor at Columbia Business School. But he cautions, "Those investments could go down in value."
The risks are real. If the economy falters, rich borrowers could see their home and investment values drop. Or, adjustable mortgage rates could rise, eating up their profit. As for the banks, they’re enjoying this new demand from the wealthy.
“The banks are now trying to find new borrowers to lend to,” NYU's Van Nieuwerburgh says, “and this is some loan business that, in their view, is pretty safe and they’re happy to do.”
Pretty safe, because these borrowers have a big house and lots of money as collateral. If necessary, the lender could require wealthy borrowers to pledge more of their investments if home values drop.
The days of no down payment loans for property speculators or people with weak credit are over. But there no down payment loans for some homebuyers who aren't rich -- just yet. But they'll have to have certain professions, like the one practiced by Bill Cosby's TV character, who was famous for eye-scorching sweater patterns rather than the scrubs he wore on the job.
“If Cliff Huxtable came and started looking for a loan with us, we’d be delighted to lend to him,” Greg Wheeler, president of the private bank at BOK Financial, says, referring to the doctor played by Cosby.
He’s kidding, of course. Wheeler’s bank is not in the business of handing over money to 80's sitcom doctors. But it does have a growing business in no down payment loans for real doctors, even those just starting out. Many banks have special products for doctors, who can be profitable customers over the years.
“They tend to be very loyal clients,” Wheeler explains. “We want to engender that loyalty and have them join us early as clients. And we keep them for a very, very long time.”
No down payment loans may evoke memories of a swelling housing bubble. But in another form, they’re a way for banks to snare some big money clients.