2008 all over again? BofA just launched a test of zero-down-payment, zero-closing cost mortgages for minority communities

2008 to start again? BofA just launched a test of mortgages with no down payment and no closing costs for minority communities

A major US bank has launched a new program to help minority first-time buyers finance the purchase of a home without down payment or closing costs. It’s a boon for buyers at a time when rising interest rates and low home inventory have stacked the deck against them.

It is also the latest response to longstanding criticism that banks favored white borrowers.

Bank of America test plan is deployed in Los Angeles, Dallas, Detroit and Charlotte and targets predominantly minority neighborhoods in these cities. It offers loans to minority buyers without the need for a down payment, closing costs or private mortgage insurance (PMI), a usual additional cost for buyers who pay less than 20% of the purchase price of the house. home.

Basically, the program also does not require any minimum credit score, with eligibility instead focusing on the borrower’s solid track record of rent payments and regular monthly bills like utilities and phone. Before applying, buyers must complete a homebuyer certification course that advises them on ownership responsibilities and other considerations.

But the move quickly drew mixed reactions online, as Bank of America (and other major lenders) have come under fire in the past for predatory lending practices, particularly when lending to minority groups.

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Loans with no down payment – a timely boost

For buyers in Bank of America’s test cities, loans come at a critical time.

Rising interest rates make mortgages more expensive and create downward pressure on lenders to ensure their loans are as risk averse as possible. Bank of America’s program aims to break that by freeing qualified applicants from down payments, credit score standards and PMI costs.

This lowers many homeownership barriers for buyers in communities struggling with institutional lending that often favors white borrowers.

“Homeownership strengthens our communities and can help individuals and families build wealth over time,” said AJ Barkley, Bank of America’s neighborhood and community lending manager.

White household ownership was 72.1% in 2020, according to the National Association of Realtors — compared to 51.1% for Hispanic households and 43.4% for black households.

And black borrowers are denied twice the rate of all borrowers, according to a recent report from LendingTree.

Bank of America’s plan adds to its $15 billion program which provides closing cost and down payment assistance to low-income buyers and another initiative to provide $15 billion in mortgages to low-to-moderate income buyers through mid-2027.

Equity risk

However, critics of the program were quick to point out that it could backfire and potentially harm the communities it is meant to help.

The housing crisis of 2008 — which was heavily influenced by risky lending to unqualified buyers – taught hard lessons to lenders who were stuck with foreclosed homes after buyers stopped making payments on properties they had never been able to afford.

The consequences were devastating: lenders inherited foreclosed homes and buyers saw their credit scores sink.

It’s likely that at least some of the borrowers in Bank of America’s new program would be considered “subprime” under ordinary lending rules – reminiscent of the ugliest days of the 2008 crisis and providing critics with talking points easy. Credit agency Experian, for example, considers borrowers with credit scores between 580 and 669 as subprime.

And while credit scores aren’t always an accurate barometer of a buyer’s purchasing power or ability to make timely payments, advocates worry that the interest rates required to make up for the low bar set by the lender does not put minority buyers in check.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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