Fannie Mae's new mortgage plan raises concerns over defaults

The Federal National Mortgage Association (Fannie Mae) is rolling out a new mortgage programme, HomeReady, which allows immigrants to the US (mainly Hispanic) to qualify for home loans based on income from non-borrowers living in their households; previously, a person's mortgage fitness was based on the income of the borrower. This has led experts to predict a surge in loan defaults, similar to the sub-prime mortgage crisis of 2008. Investors Business Daily points out it may as well be called "DefaultReady", as it is just as risky as the "subprime junk Fannie was peddling on the eve of the crisis".

As the old saying goes, those who do not learn from history are doomed to repeat it.

As the old saying goes, those who do not learn from history are doomed to repeat it.

Remember a few years back when Fannie Mae aggressively targeted lower-income folks with home loans they couldn’t really afford? The subprime program was called MyCommunityMortgage, and due to its relaxed lending rules, scores of borrowers quickly got in over their heads, fell behind on their payments and lost their homes to foreclosure. What ensued became known as the subprime mortgage crisis.

Undaunted by that failed program, the White House is rolling out another program just like it — this time, targeting immigrants (primarily Hispanic) who live together and pool resources. According to Fannie, 1 in 4 Hispanic households share homes (and money) with extended families. This latest doomed program, dubbed HomeReady, will allow this large “underserved” market to qualify for home loans based on income from nonborrowers living in their households. While the initiative might help some immigrants become homeowners, it will serve as a recipe for loan default for many more.

Before the housing crisis, the income on your loan application had to be your own. Under the new program, however, you can get a home loan by claiming other people’s income. Do you share an apartment with friends or family? All of their income counts. Your parents’ and grandparents’ income counts, too — even if they don’t live with you. You can even live in government housing and have bad credit. And you might only have to put 3 percent down. If you can meet the debt-to-income ratio of 43 percent, you’re good to go.

Of course, Fannie doesn’t talk much about the risk of delinquency and foreclosure borrowers face should one (or more) of the nonborrowers move out of the house. As an Investor’s Business Daily editorial rightly pointed out, outside income is hard to verify and seldom stable.

The Las Vegas Valley was among the hardest-hit areas of the country during the housing crisis, and several years later, homeowners — and the economy — still haven’t fully recovered. Fannie Mae and its regulators say there’s no reason to worry, and the program won’t introduce any undue risk into the mortgage finance system. But Fannie Mae hardly has the credibility to make such a statement. The program should be squelched before it has the chance to do any damage.