2008 again? BofA just launched a trial of zero-down, zero-closing mortgages for minority communities

2008 again? BofA just launched a trial of zero-down, zero-closing mortgages for minority communities

A major U.S. bank has launched a new program to help minority first-time buyers finance a home purchase with no down payment or closing costs. It’s a boon for buyers at a time when rising interest rates and low housing inventory are stacked against them.

It’s also the latest response to long-standing criticism that banks have favored white borrowers.

Bank of America’s test plan is rolling out in Los Angeles, Dallas, Detroit and Charlotte and is targeting minority neighborhoods in those cities. It offers loans to minority buyers without the need for a down payment, closing costs or private mortgage insurance (PMI), an extra cost common for buyers who put down less than 20% of the home’s purchase price.

Most notably, the program also requires no minimum credit score, with eligibility instead focused on a solid history of rent payments and regular monthly bills like utilities and phone. Before applying, buyers must complete a homebuyer certification course that advises them on home ownership responsibilities and other issues.

However, the move quickly drew mixed reactions online, as Bank of America (and other major lenders) have been criticized in the past for aggressive lending practices — especially when lending to minority groups.

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No loans – a timely boost

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

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

This lowers many of the barriers to entry to home ownership for buyers in communities battling institutional lending that often favors white borrowers.

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

Homeownership by white households was 72.1% in 2020, according to the National Association of Realtors — compared to 51.1% for Hispanics and 43.4% for black households.

And black borrowers are rejected at twice the rate of overall borrowers, according to a recent report from LendingTree.

Bank of America’s plan adds to its $15 billion program offering closing cost and down payment assistance to lower-income buyers and another initiative aimed at providing $15 billion in mortgage loans to low- to moderate-income buyers by mid-2027 .

Equity risk

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

The housing crisis of 2008—which was caused in large part by risky loans to unqualified buyers—taught hard lessons to lenders who were stuck with foreclosed homes after buyers stopped making payments on properties they could never afford.

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

It is likely that at least some of the borrowers under Bank of America’s new program would be considered “high risk” under normal lending rules – recalling the worst days of the 2008 crisis and providing critics with easy talking points. The credit rating agency Experian, for example, considers borrowers with credit scores between 580 and 669 to be subprime.

And while credit scores aren’t always an accurate barometer of a buyer’s purchasing power or ability to make on-time payments, advocates worry that the interest rates required to offset the low bar a lender sets could cause minority buyers to fail .

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

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