Bank of America is announcing a new mortgage that will allow potential home buyers with income below the area median and a credit score of at least 660 to get a mortgage with as little as a 3 percent down payment. The new loan will not require private mortgage insurance and will not be insured by the Federal Housing Administration (FHA). The bank is partnering with Self-Help Ventures Fund and Freddie Mac for this program. Bank of America will make the loan and then sell it to Self-Help, which will sell it to Freddie Mac. If borrowers default, Self-Help will absorb most of the losses, eliminating the need for mortgage insurance.
This is an intriguing development – a low down payment option for lower-income buyers with decent credit scores. Bank of America estimates that the monthly cost of the new mortgage will be significantly less than an FHA loan for the same amount, about $100 per month less on a $150,000 mortgage, and so borrowers who can qualify stand to benefit. Self-Help’s parent organization has experience with successfully making low down payment mortgages to low-income borrowers with the Community Advantage Program. Those mortgages performed well throughout the foreclosure crisis, and so Self-Help’s involvement with this program bodes well because it knows how to help lower-income homeowners avoid default and foreclosure.
The new mortgage program could address a couple of pressing issues in the mortgage market. Right now, the FHA is about the only game in town for low down payment mortgages. Fannie and Freddie have tried, but their products are more expensive and have not been very popular. The Bank of America product could open up the market. At the same time, many mainstream lenders have been increasingly reluctant to offer FHA mortgages because of potentially large liability for minor errors in underwriting. Bank of America may have found a way around that problem. Finally, having Self-Help absorb the bulk of losses, before Freddie, tests a new model for the mortgage market, one in which private investors shoulder most of the credit risk, with Fannie and Freddie at less risk of needing a bailout. While only time will tell if this new product is successful, Bank of America, Self-Help, and Freddie have set up a bold experiment, and we should learn a lot from it.