Zero Down Mortgages Three Times More Likely to Default Than Those with 10 Percent Down

November 30, 2009 No Comments »

zero down

Some interesting tidbits from a housing symposium held earlier this month involving representatives from Amherst Securities and mortgage insurance company Genworth:

Genworth President Kevin D. Schneider said a mortgage with a 0% down payment defaults three times more often than a mortgage with a 10 percent down payment.

All the more reason for the FHA to consider a larger minimum down payment, currently set at just 3.5 percent (there is currently legislation pushing for five percent).

Schneider also noted that interest-only mortgages were 3.7 times more likely to default than standard mortgages, while option-arms were 8.8 times more likely to default.

Laurie Goodman, a Senior Managing Director at Amherst Securities, said home prices have 8-10 percent further downside, adding that the housing overhang is “very substantial.”

As a result, even after home prices trough, they are expected to remain flat for “a long period of time” while up to seven million housing units eventually liquidate.

Higher priced homes may see more potential price downside thanks to limited non-agency (jumbo) loan origination.

Goodman also noted that cure rates, when a delinquent mortgage becomes current again, were low and the higher the loan-to-value, the greater the chance of default.

The data supports the argument that home price depreciation is the leading cause of default, not unemployment, an issue lenders and servicers must come to grips with if they want to prevent more foreclosures.

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