National issues

The foreclosure resistant low income mortgage loan

Several hundred homes like this one have been built in El Paso County with Section 502 loans that are highly affordable and highly foreclosure resistent.
Several hundred homes like this one have been built in El Paso County with Section 502 loans that are highly affordable and highly "foreclosure resistant".

The $700 billion bailout of Wall Street brought about by the subprime/ predatory mortgage debacle points out that there needs to be a better, safer and cheaper alternative mortgage for lower income families buying a home.

Such a loan needs to be affordable and needs to be able to be adjusted based on the borrower’s financial circumstances over time.

One of the best kept secrets out there is that just such a mortgage exists and has  proven successful for many decades. It is called the USDA 502 Direct Loan. It is administered by the US Department of Agriculture Rural Development program.  It is only available for homes in small towns and rural areas.

Ironically, the Bush and Clinton Administrations have all but killed off this highly effective program through the budget cutting process.

The 502 Direct Loan program is very affordable.

Individuals or families receive financial assistance directly from the Rural Development program in the form of a home loan at an affordable interest rate. The payment is subsidized based on the buyer’s adjusted gross income and number of household members.  Depending on the borrower’s ability to pay, payments can be reduced to a level equal to a principal and interest payment at 1% interest rate, plus property taxes and home owners insurance.

Up to the full subsidy amount can be recovered by the USDA Rural Development program when the homeowner sells the house.

Applicants for direct loans must have very low or low incomes. Very low income is defined as below 50 percent of the area median income (AMI) (that is $27.500 or less for a family of three in the Houston PMSA); low income is between 50 and 80 percent of AMI (a maximum of $44,000 for a family of three in the Houston PMSA).

Families must be without adequate housing, but be able to afford the mortgage payments, including taxes and insurance, which are typically within 22 to 26 percent of an applicant’s income. However, payment subsidy is available to applicants to enhance repayment ability. Applicants must be unable to obtain credit elsewhere, yet have reasonable credit histories.

Loans are for up to 33 years (38 for those with incomes that are very low and who cannot afford 33-year terms).  The promissory note interest rate is set based on the government’s cost of money. However, that interest rate is modified by payment assistance subsidy.

The borrower’s payment of principal, interest, taxes, and insurance is the higher of: 24 percent of borrower’s adjusted annual income; or principal and interest calculated at 1 percent on the Rural Development loan plus taxes and insurance.

Besides being super affordable the mortgage payments can be adjusted based on the borrower’s ongoing financial circumstances. Loan payments can be recalculated at any time if the borrower has a change in financial circumstances. If disaster strikes and a borrower becomes sick or otherwise cannot afford to pay, loan payments can be temporary suspended and the term of the loan extended to cover the missed payments.

If we had gone with this approach to providing affordable home mortgage loans instead of deregulating the mortgage industry and letting them go hog wild with subprime and predatory loans millions of families would not have lost their homes to foreclosure and the taxpayers would not have been bailing out the Wall Street sharks to the tune of $700 billion.

Robert J. Shiller, professor of economics at Yale, writing in today’s New York Times, suggests that…

In this time of economic crisis, help for troubled homeowners often arrives late, when it arrives at all. All too frequently, families are going into default on their mortgages, facing foreclosures and evictions that may have traumatic consequences.

It doesn’t need to be this way. Mortgages could be structured differently, so that adjustments in payments would be made as a matter of routine – systematically, automatically and continuously – starting even before any distress is perceived by borrower or lender. By avoiding thousands and even millions of individual family crises, we might also make institutional crises, like the collapse of Lehman Brothers and Bear Stearns, less likely.

The basis for this such a mortgage can be found in the existing Section 502 Direct Loan Program.

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