How did we get into the housing bubble? Oh yeah, the dumb-as-dirt idea of writing mortgages for little or no money down which, along with artificially low early year teaser rates, lured people into buying more house than they could actually afford.
In other words, all this fancy FinReg we’ve been hearing about means that lenders have to return to sane underwriting standards, right? Erm, maybe not.
Fannie Mae opened up a new program in four states called Affordable Advantage which allows people to buy houses with — you guessed it — almost no money down. Some of these states are also handing out grants to cover closing costs. The homeowners have to contribute $1,000, have a credit score over 680 (higher in Massachusetts), live in the house as a primary residence and go to mandatory credit counseling. Because the loans are made through state housing agencies and do not feature adjustable rates and require full income verification, the state housing agencies believe they will not have a high rate of default. We’ll see.
Fannie Mae is also trying to unload its huge inventory of broken-down foreclosed houses by offering them for sale with down payments as little as 3%, low credit scores acceptable, no appraisal requirement, and with additional financing up to 20% of the purchase price of the house to do “light” renovation like putting on a new roof or installing a new heating system. In locations where you cannot get a mortgage for a house that can’t qualify for a Certificate of Occupancy, you have to get a construction loan that is then converted into a mortgage once you finish making the house habitable.
It appears Fannie Mae is giving a wink-and-nod to this cute habitability thingy. If you buy one of Fannie’s “bargains," you won’t know how much you are overpaying for it, because there was no appraisal, and if you have to do work on it to make it eligible for a Certificate of Occupancy, you could be as much as 17% underwater on the purchase price the day you close. Depending on how much you have overpaid for the house, your underwater percentage could actually be much higher.
Who wants to give odds on how many of these homes will be right back in foreclosure a year or two down the road?