by Calculated Risk on 3/08/2005 01:46:00 AM

The article "Risky real estate moves" on CNN Money discusses the growing prevalence of no money down home purchases by first time buyers. The article presents a table showing the percentage down payment for first time homebuyers. The following table combines CNN's table (data from the National Association of Realtors in early 2005) with earlier data from NAR in early 2003.

Source: NAR 

Click on graph for larger image.

Fully 42% of first time buyers put no money down and 69% put less than 10% down. Two years ago 28% put no money down and 61% put less than 10% down. Clearly first time buyers are opting for more leveraged transactions.

The CNN article also discusses three leveraged borrowing programs. The first, "piggyback" loans, allows the homebuyer to take out a line of credit to cover the down payment resulting in 100% financing.

The second, interest only loans, allows the buyer to purchase more home by limiting their payment to the interest due. And the third program has several payment options, including a "minimum payment" that allows the buyer to pay less than the interest owed, resulting in an increasing loan balance.

All of these programs are increasing in popularity and increasing the amount of leverage for the buyer. The third program, combined with no money down, creates significant systemic risk. Who bears the risk? Not the first time buyer. Since the loan is collateralized with the house, the buyer can just walk away and only suffer the minor indignity of a foreclosure on their credit record. The real risk is borne by the lender.