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No money down home loans return, with a twist

A car drives by a luxury home in the Sea Cliff neighborhood of San Francisco, Calif.

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.

Kai Ryssdal: We heard a lot about no money down mortgages during the housing boom. People using them to buy houses they couldn't afford. We all know how that ended, but get this: now we're hearing about them again.

This time around, really, really rich people using them to buy houses they can definitely afford. Sounds a little silly to skip a totally doable down payment and pay interest they don't have to. But it's actually an interesting gamble for those buyers and their banks.

Marketplace's Mark Garrison explains.


Mark Garrison: 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. That’s 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 their wealth as collateral, instead of coughing up a down payment. NYU real estate finance professor Stijn Van Nieuwerburgh explains the appeal.

Stijn Van Nieuwerburgh: Interest rates are historically low. At the same time, the stock market is doing really well. And 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% interest on a mortgage. They don’t have to divert their money to make a down payment. And if they leave it in investments that earn more than 3%, that difference is the profit.

Chris Mayer: If they’re clients who have a high enough net worth, maybe for them, that’s a good decision.

But Columbia real estate professor Chris Mayer is quick to add that there is risk. 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, NYU’s Van Nieuwerburgh says they’re enjoying this new demand from the wealthy.

Van Nieuwerburgh: The banks are now trying to find new borrowers to lend to 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 lots of money and a big house as collateral. The days of no down payment loans for speculators or people with weak credit are over. But there is a way to get a no down payment loan if you’re not rich, yet. You’ll need a certain job, like this fellow, known for sweaters with patterns that positively scorch the eyes.

Greg Wheeler: If Cliff Huxtable came and started looking for a loan with us, we’d be delighted to lend to him.

Greg Wheeler is kidding, of course. You don’t become president of The Private Bank at BOK Financial by handing over money to 80s sitcom doctors. But the bank does have a growing business in no down payment loans for real doctors, even those just starting out.

Wheeler: They tend to be very loyal clients and we wanna engender that loyalty and have them join us early as clients. And we keep them for a very, very long time.

Many banks have special mortgages for doctors, who can be profitable customers over the years. 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. In New York, I'm Mark Garrison, for Marketplace.

About the author

Mark Garrison is a reporter and substitute host for Marketplace, based in New York.

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