Sep 8, 2022 - Economy

Why "zero-down" mortgages are gaining ground

Illustration of a welcome mat that is a one-hundred dollar bill.

Illustration: Maura Losch/Axios

You can expect more banks to start offering mortgages that don't require some first-time buyers to save up a large down payment — part of an effort to close the racial and ethnic homeownership gap, which is a big piece of the racial wealth gap.

Driving the news: Bank of America's recently announced "zero down payment" loans for first-time homebuyers in predominately Black and Hispanic neighborhoods who meet certain income requirements.

  • Two other banks, JPMorgan Chase and TD Bank, offer similar programs. If they were adopted widely in both the public and private sector, programs like these could truly make a dent in the racial homeownership gap — but so far they haven't been.

Details: Bank of America's "zero down payment" loans are a bit of a misnomer. They do technically require a down payment, but the bank is offering grants of as much as $15,000 to cover it.

  • So buyers don't have to come up with the down payment, but they are not borrowing the entire cost of the home, and they wind up holding some measure of equity right off the bat.
  • That's distinct from the zero-down loans that, along with questionable underwriting standards, helped make such a mess in the run-up to the Great Recession.

What they're saying: "There are a handful of banks that are interested in this," said Liam Reynolds, a research assistant at the Urban Institute who co-wrote a piece about these types of programs earlier this year.

  • If the programs proliferate, "then they do have the ability to actually make a meaningful dent in the homeownership gap," he told Axios.

Why now: The programs are gaining traction now partly because of the renewed focus on racial equity coming out of the protests of 2020 and because of the White House's support, Reynolds said. "It has certainly helped that the administration has encouraged them so much."

  • Back in 2020, BofA and JPMorgan both pledged to spend billions of dollars on racial equity. JPM's program is related to its pledge, though it hasn't capped the amount of money it can spend.
  • BofA's program complements their pledge, but the funding is separate, a spokesperson told Axios: "This program aims to address the unique challenges and needs that minority homebuyers face."

BofA also has a separate, and very similar program, launched in 2019, that offers down payment grants in 69 markets across the country.

  • That grant program, which has stricter criteria than the bank's latest offering announced last week, lent out more than $9.5 billion in mortgages in total, helping 36,000 people.
  • That sounds big, but consider that the bank lent out $14.5 billion in mortgages over just three months this year.

State of play: These programs allow lenders to target neighborhoods that are predominantly Black or Hispanic.

  • The banks use what's called a special purpose credit program (SPCP), a policy made possible by the 1974 Equal Credit Opportunity Act, that actually permits lenders to discriminate in order to help disadvantaged borrowers.
  • Federal regulators across several agencies have issued guidance on SPCPs over the past year or so encouraging their use.

Zoom out: The origins of the racial homeownership gap lie with the actions of the federal government and the private sector. Through redlining, they worked in concert to exclude majority Black neighborhoods from mortgage lending.

  • Black buyers couldn't get the federally backed mortgages that helped launch so many Americans into the middle class, setting them on a path to providing generational wealth.
  • The practice was outlawed in 1968 but its legacy haunts the housing market to this day.

Go deeper: Race and housing in America.

Go deeper