Another Housing Crisis May Be Coming

Federal National Mortgage Association (“Fannie Mae”) is planning to reboot the lending industry which may produce the same predictable consequences of the prior housing crash when the mortgage agency loaned so much money to people who had not enough income or credit to qualify for a traditional loan.

The Obama administration proposes the HomeReady program, a new mortgage program largely targeting high-risk immigrants. This program would allow a borrower to count the income of the entire household rather than solely the borrower(s). Changing the word “subprime” to “alternative” mortgages is supposed to be more acceptable to the public, but no different in essence. 

Traditionally, one’s mortgage worthiness was supposed to be based on the income of the borrower(s), the person or people named on the loan and deed to the property with a personal investment in the property (or at least their credit). Under this new scheme, the combined income of everyone living in the house will be considered for a conventional home loan backed by Fannie. One may even claim income from people not living in the home, such as the borrower’s parents. 

This is purportedly to target non-traditional family types where multiple generations live in one home, such as Hispanic families, but will likely lead to large numbers of defaults when the expected income is not there to pay the monthly payment; or exaggerated by the “borrower(s).”

Under this latest proposal, no credit? No problem. An immigrant can qualify with a credit score as low as 620; a subprime loan at the end of the day. And the borrower has only to put 3% down. 

What could possibly go wrong lending to people with poor credit scores, make up any income they want, and little money down, right?

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