David Porter over at Pacesetter Mortgage alerted me to a debate that's happening in the financial blog space regarding whether zero-down mortgages are bad for the American economy or not.

David's opinion is that zero down mortgages are a good solution for a couple just starting in their "earning years", fresh out of college, ready to assume the financial burden of a higher mortgage payment but without the resources to have any sort of down payment.

Over at the Free Money Finance weblog, however, the perspective is decidedly different:

"The trend is potentially ominous. The real estate market is cooling in some areas, and rates on adjustable-rate loans are creeping up. As a result, some no-money-down buyers could owe more than their homes are worth."

I have to say that I'm not the most risk averse person, personally, (after all, I am an entrepreneur and run my own business) but when it comes to financial issues I am pretty conservative and think that the chap who writes the Free Money Finance weblog speaks my mind more than David does.

It's not that I don't think that zero-down mortgages aren't a good idea for some people, it's that I think banks are playing too fast and loose with their loan qualification evaluations, making more and more risky loans with visions of dollar signs dancing in their eyes as a significant percentage of their customers end up defaulting, declaring bankruptcy, or otherwise being stuck in a bad situation. For years.

To be fair, David does correctly point out that zero-down mortgages aren't for everyone and he offers what seems like a reasonable risk profile. But none of the us bloggers get to set loan approval criteria at the local S&L, do we?

Actually, during the dotcom era, I helped found an Internet bank, so at some level I was involved with this sort of decision. A week of interviews with the FBI, FDIC, and more. Quite an experience!

So I hate to end this by equivocating, but I think both of you are correct in this debate. David's correct in that a zero-down mortgage can be a Godsend to families that have all their earning in the future and just don't have the resources to take that first step on the ladder to the American dream, but FMF is also correct in pointing out that there are extraordinary risks involved in a ZDM for people that aren't hip to the risk factors associated with a long-term mortgage.

And, yes, I think that banks and financial institutions have some responsibility here too. It's no different in the world of credit cards: people are way overextended with their credit and companies keep tweaking risk profiles and lobbying to change bankruptcy laws just to push for the always-increasing payout...