Amid criticism, zero-down-payment mortgages still available

New home, no money down

By Jenifer B. McKim, Globe Staff  |  October 11, 2010

Jean Marie Sideris doubted she could buy a home near her job in Cambridge, because most lenders now insist on a hefty down payment for even a modest mortgage, and she did not have that much cash. But that was before Sideris, 33, found out about a state-sponsored program that requires only $1,000 toward closing costs.

In August, she became the owner of a $213,000, one-bedroom condominium, financed through MassHousing, the state's affordable-housing bank.

"It made available places I wouldn't have been able to buy,'' Sideris said.

Home loans with little or no money down are viewed with skepticism these days, given that they were widely considered to have accelerated the nation's foreclosure crisis by encouraging people to buy properties they could not afford long term. Most lenders have shied away from offering such mortgages in recent years. But a few government programs, such as the one sponsored by MassHousing, still exist.

"There is a path for low- and no-down-payment lending if you do it the right way,'' said Thomas R. Gleason, executive director of MassHousing.

Gleason said 100 percent-financed mortgages serve qualified borrowers who don't have tens of thousands of dollars to invest in a house, and provide a boost to the struggling housing market. The quasi-state agency, which is independently funded, began the program, Affordable Advantage, in July.

No-money-down borrowing represents a tiny fraction of the total number of mortgage loans in the state and country.

Under Affordable Advantage, borrowers must have a high credit score and minimal monthly debts, and agree to counseling on such matters as how they will manage monthly payments. So far, about 100 30-year, fixed-rate loans have been approved.

The program came under fire last month after critics said no-money-down borrowing could further damage the economy. It is made possible through an agreement with Fannie Mae, the troubled mortgage giant the federal government took over two years ago.

A top official at the Federal Housing Finance Agency, which oversees Fannie Mae, said recently that he plans to cancel the program after a contract between Fannie Mae and finance agencies - including MassHousing - expires in March. The loan product is available in three other states in addition to Massachusetts.

"I believe borrowers should have a down payment if they're going to purchase a house,'' said Edward DeMarco, acting director of the federal agency.

US Representative Barney Frank, a Newton Democrat and chairman of the House Financial Services Committee, agreed.

"I think a zero down payment is a mistake,'' Frank said. "Homeownership is a good thing, but we make a mistake when we push the envelope too far. You don't do people a favor.''

Gleason said he would not fight a federal decision to cancel the program. Even without it, however, a small number of buyers may still qualify for similarly structured loans through programs sponsored by the federal government.

MassHousing decided to offer Affordable Advantage last summer after tweaking requirements to improve its success rate from a similar program started in 2002. The agency has provided 1,606 low- and no-down-payment loans over the past eight years, about 7 percent of its portfolio of home loans. The default rate during the second quarter of 2010 was 9.46 percent, about twice that of all the mortgages it services but well below the 13.3 default rate for loans guaranteed by the Federal Housing Administration, MassHousing reported.

This summer, MassHousing tightened eligibility guidelines, requiring borrowers to have a credit score of a least 720 and to show a lower debt-to-income ratio. Affordable Advantage also includes income and price limits. For example, borrowers in Suffolk and Middlesex counties, including Boston, Cambridge, and Newton, can earn no more than $118,935 and can't buy a single-family home that costs more than $417,000.

Such loan programs are not new. The US Department of Veterans Affairs, for instance, has been providing low- and no-down-payment loans to its members since 1944. More than 325,000 borrowers - about 2,000 in Massachusetts - took advantage of those terms last year, nearly double the number in 2008, according to the federal agency.

The agency's mortgages help veterans buy and remain in their homes, said Bill White, acting assistant director for loan policy and valuation at the veterans department. Nationwide, about 7.8 percent of veterans defaulted on their loans during the second quarter of 2010, well below the default rate for loans guaranteed by the FHA, according to data provided by the Mortgage Bankers Association in Washington, D.C.

"We know our program works. We never relaxed credit guidelines,'' White said. "I don't see anything that would suggest dramatic changes are needed.''

The Department of Agriculture-Rural Development has offered a no-down-payment loan option for more than 50 years. About 127,000 borrowers nationwide bought homes with the help of the USDA in fiscal 2009, according to federal officials. To qualify, borrowers must earn no more than 115 percent of the median income and live in remote areas.

The default rate has also been relatively low - about 12.2 percent in fiscal 2009, said Tammye Trevino, administrator of the Rural Housing Service, which is part of the Department of Agriculture.

"We see it as a way to provide decent, safe, and sanitary housing in rural areas where many times the access to capital is missing,'' Trevino said.

Rachael Laurie, 28, and Heath Renaud, 38, financed a $220,000 home in Russell this month with a USDA-sponsored loan. The couple, who recently adopted three young children - two brothers and a sister - moved from an apartment in the same small town west of Springfield.

Laurie said they would not have been able to save enough money for a large down payment, but can easily afford monthly mortgage payments. Renaud works as a plant manager at a label company and earns about $50,000 a year. Laurie stays home with their children, including another child and three stepchildren who visit occasionally.

"We are so lucky this program is there for people like us,'' she said.

Jenifer B. McKim can be reached at jmckim@globe.com.  

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