Housing Relief With the Two-Step

Fannie Mae’s new two-step mortgage will hardly solve the affordability crisis in Southern California, but it can bring home ownership a tiny step closer.

For too many people, home ownership has become an impossible dream in Southern California. Median prices easily top $200,000, locking out most first-time buyers. In this expensive market, the new two-step mortgage, announced Monday by the Federal National Mortgage Assn., can provide a little relief.

The new fixed-rate loan program offers a slightly lower interest rate than the traditional 30-year mortgage. The savings, which may translate locally into as much as half a percent of interest, will make it a little easier to qualify for a home loan. Nationally, it is predicted, the new loan will help 110,000 additional buyers qualify for a mortgage. In California, as many as 15,000 families may find it easier to buy a house.

The two-step loan locks in the lower interest rate for seven years. At that point--if the home-buyer has not moved--the second step adjusts the loan up or down to market rates. Fannie Mae, the country’s largest investor in home mortgages, provides added protection by capping the adjustment at 6 points above the initial interest rate.

All this amounts to a helping hand to first-time buyers. Say a young couple want to buy a condominium, the most affordable housing in this market. They have the required 10% down payment for a real good deal--$139,300, the median price for the state. At a fixed interest rate of 10.5%, they need an income of $56,000 to qualify. At the two-step rate, starting at 10%, they would need $54,000 in income to get the loan. That step can mean the difference between renting and owning.

This new program is an imaginative attempt to address the moderate-income housing crisis.