Analysts say that the huge number of home loans offered in previous years with no down or low down payments are to be blamed for the foreclosure crisis, as these loans attracted homebuyers who didn’t have the income to sustain the monthly payments. It’s baffling therefore for many that several state agencies are again offering these types of home loans and that Fannie Mae, Freddie Mac and the Federal Housing Administration are supporting them.
Affordable Advantage Program in 4 States
Recently, the program called Affordable Advantage program was jointly launched by Fannie Mae and the housing finance agencies of Massachusetts, Minnesota, Idaho and Wisconsin. A Fannie Mae spokesperson said the program is expected to remain small, as the initiative to launch a similar program comes from the state housing agencies. These agencies buy Affordable Advantage home loans from the banks and then resell them as securities to Fannie Mae.
Under the Affordable Advantage program, the home loans are fixed-rate 30-year mortgages with interest rates about 0.5 percentage point higher than rates for comparable conventional loans. Each applicant must have a credit score of 680 or higher, must undergo homeownership counseling, must live in the home, and must contribute $1,000 to the initial cost. In Massachusetts, the minimum credit score is 720. The agencies service the loans and monitor payments so they can quickly identify borrowers in need of help.
California Homebuyer’s Downpayment Assistance Program
In California, the state Housing Finance Agency has launched its own fixed-rate 30-year home loan program in partnership with the FHA and in conjunction with its Homebuyer’s Downpayment Assistance Program. Prospective homebuyers must meet the income limits, must have a FICO score of 620 or higher, and must complete a homebuyer counseling program. Counties have different income limits. In Los Angeles County, borrowers must be earning less than $111,020 yearly.
State Housing Agencies’ Mortgage Performance
Critics are concerned about zero down or low down home loans because these loans have historically performed worse than loans with adequate down payments. Supporters, however, like the National Community Reinvestment Coalition and the Harvard University’s Joint Center for Housing Studies explained that zero down or low down housing loan programs can be successful if they’re done right.
One factor working in favor of state housing agencies is their performance before and during the foreclosure crisis. Their default rates have been much lower than those of commercial lenders or the FHA because, unlike most mortgage lenders, the state agencies did not approve loans without proper documents and didn’t offer adjustable rates.
Additionally, these home ownership programs help financially responsible families with low or moderate incomes buy their first homes, ultimately helping rejuvenate the housing market.