Submitted by Anthony Sanders via Confounded Interest blog, [5]
Fannie Mae, the Washington DC mortgage giant, has announced their latest program: HomeReady. According to Fannie Mae,
"HomeReady is designed for creditworthy, low- to moderate-income borrowers, with expanded eligibility for financing homes in designated low-income, minority, and disaster-impacted communities. HomeReady lets you lend with confidence while expanding access to credit and supporting sustainable homeownership.”
The confidence part sounds like a Viagra or Cialis commercial. [6]
Of course the lender should feel safe — taxpayers are backing these risky mortgages … again.
Bear in mind that with only 3% downpayment, the borrower is instantly underwater and could suffer a 6% Realtor fee to sell the dwelling. Instant underwater mortgage!
The good news is that only 17% of mortgages in the US remain underwater according to Zillow.
[8]
And thanks in part to the Federal Reserve’s zero-interest rate policies, home prices have exploded since 2012, even though mortgage purchase applications have declined along with average wage growth.
[9]
With home prices rising faster than wage growth (or family income), we have a classic bubble. But with rents rising as well, we have an unaffordability problem as well. Clearly, making 0-3% downpayment loans help to solve the unaffordability problem, but also increases the risk of default. Particularly if interest rates rise and house prices tumble.
Remember, The Case-Shiler 20 City Home price index is growing at over 2x income growth.
[10]
Low downpayment lending is always a risky proposition [11], particularly if home prices tumble … again and wages continues to remain stalled.
[12]
