Fannie Mae's "Affordable Advantage" program that allows for 0% down mortgage loans was recently announced. Still in its infancy, it is set to expand to a handful of states in the near future. This has quite a few people raising some eyebrows: "Zero down? Here we go again! Another mortgage default fiasco! Didn't we learn from what happened in the past few years?" Well, this is what I learned:
Zero-down loans alone did not get us into this mess. Neither did stated income loans (no income verification) or bad credit borrowers. It was a combination of all three! (add to that mix negative amortization loans and ARM's with insane financing rates for the icing on the cake).
To be honest, I really learned that before all this craziness went down. Zero-down loans are nothing new. Since the beginning of time (meaning since the 1930's, when Fannie was born), before Wall Street got their hands on housing lending, conventional loans were based on those three criteria (credit, income/employment and down payment) plus debt/income ratios, but a deficiency in one was compensated by higher requirements for the others. Don't have enough for a down payment? That's OK, as long as you have great credit and solid employment. You have bad credit? Also doable, but now we really do require from you a larger down payment and again solid employment.
And it worked for all those decades. Defaults were minimal, housing apreciated at a steady rate, and best of all Fannie Mae was profitable. So there's the time-proven formula that works, developed and fine tuned by the research and experience of mortgage industry experts throughout the decades. It's a fine balance between ease of home ownership, low default rates, affordability, profitability, and appreciation.
So since we know that people with great credit and income historically are excellent at paying their mortgages, why on earth would we not want to bring in those buyers into the market by reintroducing zero-down loans under the old guidelines during a time when low housing demand and excessive mortgage defaults are sending the economy further into turmoil? Because that's how some lawmaker that's not educated on the mortgage industry and its history responds to the cries of the panicking masses? Is that who we want in control? Ignorance and mimicry is part of what got us into this mess.
Learn from history. But learn from ALL of history, not just recent history.
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