Will Fannie loan lead to more foreclosures?
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
Earlier this week in San Diego and with a festive atmosphere, 4,500 attendees gathered for the Mortgage Bankers annual convention with lots of new lending stuff to ponder.
Leave no doubt, the race to the bottom is upon us again. Top of the list is Fannie Mae’s enhanced affordable lending product called HomeReady Mortgage.
Fannie Mae’s race is with the FHA. HomeReady offers a low-cost 3 percent down payment loan for low-to moderate income borrowers, adding expanded eligibility for financing homes in designated low-income and minority communities.
Let’s talk credit. How about no credit score at all? No credit scores or credit history is necessary so long as you can establish non-traditional credit (rent, utility bill and your gym membership payment, for example). Hey, Fannie will even allow a 30-day delinquency in certain instances of the non-traditional credit. Nice!
The ratio of total house payment and other bills to monthly gross income is high at 45 percent. Keep going! We can throw in income from a generous definition of non-borrowing family members to push that baby up to a 50 percent ratio of total bills to income. No application and no note signing for the non-borrowing family member, just proof of income and a pledge to occupy.
Need more help? Rental income from an accessory dwelling unit on the property that does not need to comply with local zoning laws can be used.
Unlike FHA, HomeReady mandates that its loans go for particular low-income or high-minority census tracts.
So the most dangerous part of this program is the potential of clustering a lot of low-down payment, high debt-to-income loans in underserved communities supported by borrowers that have little or no traditional credit experience. If even one foreclosure hits, it could have a cascading negative effect on property values of the entire community. Do you remember the term underwater borrower?
Don’t get me wrong. There are thousands of successful Orange County homeowners who got their first shot at homeownership with weak credit, gift funds and mom and dad co-signing. What scares the heck out of me on HomeReady is the potential for layers upon layers of weak credit allowances.This program is ripe for income, credit and occupancy fraud.
One convention participant best said it as, “Home ready for foreclosure.”
Next week’s column will discuss new loan programs and lender innovations from this convention and the National Association of Mortgage Brokers convention held recently in Las Vegas.
Jeff Lazerson - Mortgage Columnist since 2011