Over at Realty Check this morning, our colleague Diana Olick describes the latest government mortgage program that allows first-time home buyers to pick up a home with no money down.
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.
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.
Diana is being too kind to the government here. The arguments for the program are not really persuasive. Adjustable rate loans are not the primary drivers of defaults—the primary driver is the combination of borrowers who have negative equity and expect that the value of their home will not appreciate soon. This means that no money down home loans are particularly dangerous—regardless of how vigorously lenders counsel homeowners or screen for credit scores.