Zero Down Mortgage Bonds

Mortgage Bonds are purchased from retail lenders that “sell their mortgages” on properties and assets. A zero-down mortgage bond essentially comes from buying a security on a zero down mortgage home loan.

This is where the borrower has taken a loan on a property without putting in a down payment. There is essentially a lot more risk on this kind of mortgage bonds because borrowers who have not put in any kind of deposit into their home loan are more likely to default on their loan then those who have already invested into their property.

Disadvantages of Zero Down Mortgage Bonds

Zero down mortgage bonds are not common in the market but have emerged after the prevailing popularity of zero-down home loans. Banks offering zero down mortgage loans have to decrease their risk and increase their debt-to-equity ratio in order to meet federal guidelines. But at the same time have to be competitive in the banking and lending market offering better deals every time.

Research showed that borrowers who took zero-down mortgages were more likely to default on their loans because they had less to lose. Those who have kept in a deposit were more persistent in making their payments and trying to keep their mortgage afloat because their already have a strong vested interest in the mortgage. If they can’t make payments they stand to lose both their property/asset and the payments and deposits already made on the property. Zero down borrowers are basically where they started off at in the case of a default.

Advantage of Zero Down Mortgage Bonds

This is not to say that Zero down Mortgage Bonds is not a good investment. With the added level of risk come higher returns. Banks and lenders usually charge higher interest rates on Zero-Down mortgages. It can be a flat out higher rate or seemingly lower rates in the form of “adjustable rate mortgages” which reset to higher levels somewhere during the mortgage term. Banks and retail lenders offer a larger percentage to make up for it and there are many banks that offer guarantees on the bond payment. Very few will guarantee interest but there are cases where your principal can be protected.

When choosing Zero down Mortgage Bonds make sure to look at the Bond’s past performance figures. Ask your financial broker if the bank had a strong history of defaulters and the average returns got by investors.

After all even with the added risk your bond is secured with a property and the worst-case scenario is often just losing out on earning the extra interest.

Current Market Conditions

However with the current situation in the world markets especially the high degree of debt among financiers, Zero-Down Mortgage Bonds can be very high risk. Most banks and retail lenders have been recently been hit with many defaults on their mortgages and have built a high amount of debt in their balance sheets. This is primarily because of loose borrowing policies like Zero-Down Mortgages and low interest rates in order to remain competitive.

Also a lot of borrowers are defaulting once their “adjustable rate mortgages” are resetting and switching to higher rates. If any of these institutions go down it is the investors who will get hit the hardest because they are the indirect financiers of the mortgage loans.

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