A new loan product from Countrywide Credit Industries is fueling concern that mortgage lenders may be taking on too much risk in order to sustain loan volume as interest rates rise.
Though some observers said the Zero Down Plus loan is a good product for consumers and poses little or no risk to the company, others said this kind of loan could go bad if the economy runs out of steam.
"If this becomes the product for 2000, we may be facing some risk," said Walter C. Klein Jr., president and chief executive officer of First Nationwide Mortgage in Frederick, Md.
Zero Down Plus, which is being offered by the Calabasas, Calif., company's Countrywide Home Loans Inc. subsidiary, is intended to assist homebuyers who have good credit but not enough cash for a down payment and other loan costs.
Customers can borrow up to 103% of the property's purchase price, and fees such as closing costs and mortgage insurance premiums can be financed along with the home purchase. The borrowing limit is $252,700; the product offers 15- and 30-year terms at a fixed interest rate.
Zero Down Plus is one of several of zero-down loans Countrywide has introduced in the last year, as mainstream lenders entered a category that historically has been dominated by high-loan-to-value specialists.
Countrywide's other products include a loan that helps homebuyers avoid private mortgage insurance by using an 80% first-lien and 20% second-lien mortgage. Another gives 100% financing to borrowers with incomes no more than 120% of the medians in their areas who do not already own property or land.
The company emphasizes that these products foster homeownership and are geared to very creditworthy borrowers. But some experts see them as a response to the decline in mortgage volume precipitated by rising interest rates.
Mike McMahon, an analyst at Sandler O'Neill & Partners in New York, said that fewer originations mean plenty of twists and turns in product offerings as lenders vie for a smaller pool of borrowers.
Though 100%-LTV products can be good when well underwritten, "the less you put down, the higher the default rate," said Mr. Klein of First Nationwide. "That's true across race and across income." He said the economy may be at its peak and a downturn could devastate these types of loans.
Tom Halley, executive vice president of the central division for Countrywide Home Loans, said, "We are always looking for new ways to come up with new products to increase market share."
He said that the Zero Down Plus loan requires mortgage insurance and that Countrywide has set a minimum Fair, Isaac & Co. credit score of 700 for the product. It is targeting areas where property values are stable or increasing.
"We are hanging our hat on" the Fair, Isaac rating, Mr. Halley said. "Someone with a 700 score is someone who has great regard for paying his or her bills on time." He added that Countrywide expects its automated underwriting system to reject people with potential problems.
Mr. Klein cautioned that a good credit rating does not necessarily mean less risk to the lender. In today's hot economy, many people have good credit scores, he said, but that "is not a paycheck."
Mr. McMahon of Sandler O'Neill said Zero Down Plus sounds like a good product for Countrywide and would not increase its risk. He explained that credit-scoring models have been refined to a point at which lenders can more accurately gauge risk. Countrywide is only a conduit, he said, and mortgage insurers shoulder the risk.
An industry analyst who asked not to be identified said he worries about the inherent risk when borrowers have little or no equity in a property. "When dealing with zero-down, you have to know the borrower has the ability to handle" repayment, he said.
Though this type of borrower lacks the cash for a down payment, he or she probably has substantial net worth, Mr. McMahon said. He added that Zero Down Plus should work well for homebuyers who, for example, do not want to sell stocks, pay capital gains taxes, and lose an investment balance in order to cover a down payment. "Countrywide is not taking any additional risk with this product," he said.
