With home prices rising, interest rates falling and builders building, some prominent housing advocates are calling for a new kind of loan for buyers with lower incomes or bad credit.
They’d like to call it the dignity mortgage, but it has another name, one that’s become more of an epithet since the housing crash: subprime.
Applicants might include people caught in the early stages of the mortgage meltdown who have since rebuilt their finances, said Faith Bautista, who heads the National Asian American Coalition.
“They lost their work, their homes and their credit scores four or five years ago,” Bautista said.
Since then, she said, many have found new jobs and saved up enough for a 10 percent down payment. But they can’t get a loan because lending standards remain tight — even for the Federal Housing Administration mortgages designed to help lower-income borrowers, Bautista said.
The proposal starts with the classic subprime trade-off: a higher rate for a higher-risk clientele. Borrowers would pay 1.25 percentage points above the going interest rate, maybe 4.75 percent if more creditworthy borrowers were paying 3.5 percent.
But the deal would get better if borrowers made timely payments for five years. At that point, the extra money they had paid in interest would be used to reduce the mortgage balance, and their rate would be cut to whatever borrowers with sterling credit and 20 percent down payments were charged at the time the loan was made.
Bautista and other activists have been talking to bankers and regulators, proposing the new type of loan. The proposal comes as home lenders remain besieged by demands that they pay billions of dollars in damages for defaulted housing-boom loans.
In reaction, many banks have imposed higher standards for writing new home loans than those required by the FHA or by Freddie Mac and Fannie Mae, the finance outfits that have kept the mortgage market afloat since the financial crisis — thanks to $137 billion in taxpayer assistance.
Edward J. Pinto, a former Fannie Mae chief credit officer who argues that lax FHA lending helped feed the foreclosure crisis in low-income neighborhoods, said the dignity mortgage proposal “is a stupid and crazy idea — a poison pill.”
