Yesterday the Federal Housing Finance Agency issued new underwriting guidelines that allow some home buyers to take out mortgages with down payments as small as 3 percent. Dean Baker brings down the hammer:
The NYT misled readers about the relative risk from low down payment loans in an article on the decision by the government to allow Fannie Mae and Freddie Mac to purchase loans with just 3 percent down payments. The piece cited several commentators saying that the risk of defaults would not increase substantially by lowering down payment requirements.
A study by the Center for Responsible Lending found that the default rate for loans with down payments of between 3 to 10 percent was nearly 9 percent [correction: 6.8 percent]. This is more than 80 percent [45 percent] higher than the default rate it found for mortgages with down payments of 10 percent or more.
….It is dubious housing policy to encourage moderate income people to take out mortgages on which they are likely to default….I think it’s great to help low and moderate income people get good housing. But this policy is about helping banks get their bad mortgages insured by taxpayers.
via It’s Only Taken Us 5 Years to Forget the Single Biggest Lesson of the Financial Meltdown | Mother Jones.