The Low Down On Low Down Payment Mortgages: Is It Safe?

Abstract

Low down payment mortgages were prevalent before the financial crisis, slowed down during the financial crisis, but have reemerged since the financial crisis. The Federal Housing Administration has a history of insuring 3% down payment mortgages to assist lower- and middle-income household in purchasing a home, but Fannie Mae and Freddie Mac have recently introduced 3% (and lower) down payment programs. In addition, mortgage innovation in the form of the “wealth building mortgage” with potentially 100% loan-to-value (LTV) ratio. I this paper, we examine the performance of low down payment (or high LTV) lending. We find that low initial down payment mortgages are significantly more likely to become seriously delinquent (90 days or more) than mortgages with traditional down payments of 20 percent or more.