Fannie Mae Tests Cash-Free Loan Plan
No cash for a down payment? No problem, at least not with a bold new experimental loan now being tested in four markets.
Under the so-called flex mortgage that is being tried by the Federal National Mortgage Assn., or Fannie Mae, in Seattle, Dallas, and statewide in Minnesota and Iowa, home buyers with impeccable credit don’t need any of their own money for a down payment.
Borrowers still need to have a minimum of 3% of the loan amount in cash, but the entire amount can come from practically any source. You can even borrow it or charge it to a credit card.
The only restriction is that the funds can’t come from anyone who has an interest in the transaction; that is, the seller, the real estate agent or the lender. Otherwise, almost anything goes.
Fannie Mae doesn’t make loans directly to consumers. Rather, it funnels money from investors on Wall Street into local mortgage markets. And because the company is the nation’s largest single supplier of funds for mortgages, most lenders offer the loans Fannie Mae says it will buy.
Fannie Mae has been testing the flex mortgage through a select group of lenders since early last year. But it has treated the loan, which amounts to 100% financing, as top secret because it violates an age-old maxim of housing finance.
Most lending professionals believe that borrowers should invest some of their own money in the transaction, even if it’s just 3%. Otherwise, the thinking goes, there is very little incentive for borrowers to continue making their payments should something go wrong, especially in the loan’s early years.
Data compiled by the Mortgage Guaranty Insurance Corp. show that the amount of money borrowers put up is a key factor in determining whether they lose their homes when they run into financial difficulties.
Mortgage Guaranty Insurance Corp. has found, in general, that someone who makes less than a 10% down payment is three times more likely to default as someone who puts up 15% or more of the purchase price.
That’s why buyers who ante up less than 20% are almost always required to pay for insurance that protects lenders against the greater possibility that their loans will end up in the hands of lawyers.
Not all loan pros feel that way, though. One who is “all for no down payments” is Angelo Mozilo, chairman of Countrywide Home Loans, the nation’s largest independent mortgage banker and one of the largest servicers of loans once they are on the books.
Mozilo sees “no difference” between 5% down and zero down. As far as he’s concerned, 5% isn’t enough of an incentive to keep most people who suffer through one of the three main reasons for loan defaults--a major illness, loss of employment or divorce--from winding up in foreclosure, even if it’s the borrower’s own money that’s in play.
At the same time, accumulating money for a down payment, even 5%, is a major hurdle for many prospective home owners. “Many people don’t have 5%,” Mozilo said, “but everybody’s got zero.”
That’s Fannie Mae’s thinking, too, except that the ground-breaking flex mortgage is not for everyone. Only borrowers who have excellent credit histories need apply.
What exactly does that mean? Under a credit evaluation developed especially for the experimental mortgage, borrowers must meet some pretty strict criteria:
* A minimum credit history of four installment and revolving accounts that are at least two years old. No more than nine such accounts can be open, and anything closed within the last six months counts as open.
* No history of major delinquencies--bankruptcy, foreclosure, collections or judgments--and no history of delinquency on a previous mortgage or rent.
* No more than one 30-day late payment on any revolving account ever, and none in the previous 12 months.
* Outstanding revolving account balances can represent no more than 50% of the credit available on those accounts. And the borrower cannot pay down those balances to qualify.
So far, the loan has been limited strictly to owner-occupied single-family primary residences, including condominiums and townhouses.
Also, borrowers must have two months’ worth of house payments--their own money--in reserve as a back-up should something go haywire.
Other than that, though, there have been few restrictions. Money for the 3% down payment and the closing costs can come from any combination of the following: the borrower’s savings; gifts from family members; grants from nonprofit organizations, employers or government agencies; unsecured debt or “other sources” that are not part of the transaction.
The mortgage hasn’t even been targeted to low- and moderate-income borrowers, as are most similar loans. They have been available to families of all income levels who have shown an ability to use credit wisely.
Loan amounts haven’t been held in check, either. Home buyers can use the flex loan to borrow up to $214,600, which is the statutory limit placed on any mortgage Fannie Mae purchases.
Even qualifying ratios have been expanded for the experiment. Although the rules are not rigid, normally no more than 28% of the borrower’s gross monthly income can be allotted to the house payment for principal, interest, taxes and insurance, and no more than 36% can go to cover total monthly obligations. But under the flex loan, the income-to-expense ratios can go as high as 33% and 41%, respectively.
To date, Fannie Mae has purchased 333 flex loans, mostly in last year’s last quarter, so it is too early to tell how well they are performing. It usually takes at least a year to determine whether an experimental loan like this will work as hoped.
The new loan will be made available in Orlando, Philadelphia and Atlanta by this spring, in three more as-yet-unnamed cities by summer and perhaps even more later in the year.
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Distributed by United Feature Syndicate.
