A program that accepts only homebuyers with excellent credit and employment histories is looking to expand just as the FHA is cutting some of its perks.

Posted by Mai Ling at MSN Real Estate on Monday, August 9, 2010 12:13 PM

The Federal Housing Administration is in the midst of cutting some of the perks of its homeownership program, including requiring a bigger down payment from some borrowers and limits on the amount that sellers can contribute to a buyer’s closing costs.

But at the same time, Fannie Mae is partnering to introduce a pilot program called Affordable Advantage, which allows first-time buyers to put as little as $1,000 down toward a home purchase, and The Washington Independent wants to know why.

So far, the three states that have adopted the program are Massachusetts, Wisconsin and Idaho, and although only a few hundred people have participated since its launch in March, the article says the program hopes to expand.

Already, The Independent says lawmakers and housing experts are wary of the program, which is an unpleasant reminder of some of the unconventional mortgages that helped kick start the housing crisis.

 But an even bigger concern is the potential for homeowners who put so little down to end up with negative equity if home values take a turn for the worse. And with Zillow reporting today that 21.5% of U.S. homeowners owed more on their homes than they were worth in the second quarter, the concern is timely indeed.

Housing expert Dean Baker, co-director of the Center for Economic and Policy Research, tells The Independent:

“I don’t understand the logic of this. House prices are still going to fall. And when they do, we haven’t helped these people who are going to have to work like crazy to pay their mortgage off, or they’re going to default. If you’re in a situation where this is the only mortgage you can get, you shouldn’t be buying a house.”

Affordable Advantage was started through a partnership with the National Council of State Housing Agencies with the hopes of breathing new life into a homeownership program through state-run housing finance agencies that ground to a halt after the financial crisis hit.

And the program does more than just offer a $1,000 down payment in exchange for a traditional 30-year mortgage, as opposed to the typical 10% down or 3.5% for homebuyers with loans guaranteed through the FHA.

The Independent says the program also includes such perks as helping homebuyers if they lose their jobs, lowered fees and no requirement that homebuyers purchase mortgage insurance. But Fannie Mae spokeswoman Janis Smith tells The Independent that traditionally, loans through these state housing finance agencies have “very low delinquency rates.” Barry Zigas, director of housing policy for the Consumer Federation of America, also has confidence in such programs: 

He argues that vetted low-income buyers have excellent track records in terms of default, as long as they are invested in their communities and have good employment and credit histories, if not savings. “The more equity you bring to your transaction, the more security you bring. But this can be a great way for people to gain access to homeownership who might not have been able to otherwise. And with mortgage rates what they are” — at historical lows — “this program lets those specific people gain mortgages.”

But other housing experts simply can’t get past the fact that the people who are backing these investments are taxpayers, through both government-sponsored Fannie Mae and the Treasury, which is the main purchaser of the bonds issued by the housing finance agencies.