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Home Ownership: Do You Really Need Skin in the Game?

Earlier this week the Federal Housing Authority implemented a new program called the Short Refi, which I discussed on the Realty Check.

It's a plan designed to give borrowers still current on their mortgages equity back in their homes, thereby reducing the chance that they will default intentionally.

It requires lenders to forgive principal, a minimum 10 percent, in return for a refi to an FHA insured loan.

Borrowers must have their primary loans reduced to 97.75 percent of the value of their homes.

At around the same time this program went into effect, the New York Times did a piece on a small program Fannie Mae is implementing through state housing finance agencies, which have been crippled by the recession. It's called Affordable Advantage, and it allows first-time home buyers in four states (Massachusetts, Minnesota, Idaho and Wisconsin) to get essentially no-money-down loans that are then sold to Fannie Mae. It requires $1000.00 down, but the couple profiled in the piece received a grant, and ended up paying just 67 cents for a $115,000 home.

The Fannie Mae program requires a minimum credit score of 680 (720 in Massachusetts) and the buyer must live in the home. All loans are 30-year fixed. The arguments for the program are persuasive: It wasn't the no-money-down loans themselves that fueled the housing crash, it was the poor underwriting. These loans are very strictly underwritten. Adjustable rate loans were the primary drivers of default, while these loans are fixed.

But what about borrowers having some skin in the game?

The government is trying to stem the tide of mortgage walkaways by creating programs that force lenders to give borrowers back home equity — and despite the small credit hit to the borrower, that's free equity. The Fannie Mae program, while helpful in getting new buyers into homes and easing some inventory, seems contradictory in its fundamental premise. The buyers in the Affordable Advantage program have no skin in the game from the start, and no guarantee that the home won't lose value over the next year.

Proponents argue that the state agencies funding the loans initially are working very closely with the borrowers, counseling them and doing all they can to keep them out of foreclosure. Yes, the program is quite small right now, but I'm guessing it will grow.

So how can the government (and yes, Fannie Mae's majority owner is the U.S. of A. Fannie Mae has not yet joined the FHA Short Refi program, but the FHA Commissioner told the Realty Check earlier this week that they were considering it.) on the one hand push lenders to give money back to borrowers, while on the other hand put brand new borrowers into a zero and potentially negative equity position all over again?

Questions? Comments? RealtyCheck@cnbc.com

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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