Introducing Fannie Mae's Instant Underwater Mortgage - 3% Down, No Cash Needed

Submitted by Anthony Sanders via Confounded Interest blog,

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.

Here is the product matrix for HomeReady, showing borrowers that they can obtain a 3% downpayment mortgage with no minimum cash contribution!

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.



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.



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.



Low downpayment lending is always a risky proposition, particularly if home prices tumble … again and wages continues to remain stalled.