Thousands of would-be home buyers without any money for a downpayment would be eligible for government-insured financing under a proposal that will be offered by President Bush in his fiscal 2005 budget.
Hailing the "zero down mortgage" as "the most significant initiation by the Federal Housing Administration in over a decade," federal housing officials said the plan to eliminate the normal three percent minimum downpayment will remove the single greatest barrier facing potential first-time home buyers.
"Offering FHA mortgages with no downpayment will unlock the door to homeownership for hundreds of thousands of American families, particularly minorities," Alphonso Jackson, acting secretary of the Department of Housing and Urban Development, said in a statement released in Washington.
According to HUD's projections, about 150,000 would qualify for the new loan in the first year alone.
FHA financing has become increasingly important in recent years as the Bush Administration has tried to increase the number of minority homeowners. He has pledged to create 5.5 million new minorities owners by the end of the decade.
Though the home ownership rate for the country as a whole was at an all-time high of 68.4 percent as of last year's third quarter, the rate for minorities lags that of whites.
According to the latest Census Bureau estimates, 74.3 percent of all non-hispanic white households own their homes. On the other hand, just 48 percent of African-American households, 47.6 percent of Hispanic families and 53.7 of Asian Americans are homeowners.
The FHA doesn't make loans directly to consumers. Rather, it insures mortgages made by private lenders. If an FHA borrower defaults of his house payments, the government reimburses the lender for his losses.
FHA loans are often considered the financing of last resort for buyers who don't measure up to the more rigid underwriting standards demanded by conventional lenders. Borrowers who don't qualify for government funding must either take out so-called "subprime" loans which carry rates that are several percentage points higher or not buy at all.
Normally, the FHA requires a downpayment of three percent to five percent of the loan amount.
But Federal Housing Commissioner John Weicher said the White House doesn't think those who can afford the monthly payment but have been unable to save for a downpayment should be deprived from owning a home.
"And under this program, they won't be," he said in announcing the initiative at the National Association of Home Builders' annual convention in Las Vegas.
Though the nothing-down proposal could be enacted as freestanding legislation, it will be proposed as part of HUD's budget. And if approved as such by Congress, the earliest it would be available would be Oct 1, the beginning of the new fiscal year.
Assistant Sec. Weicher said his department could issue regulations fairly easily once it is approved. If Congress shows enthusiasm for the plan, he added, "we will work quickly to implement the rules as fast as possible."
Weicher said he expected no opposition to the program. "We won't be competing with anyone," he said. "We're reaching into a market not now being served."
However, private mortgage insurers as well as some nonprofits which provide downpayment assistance to otherwise credit-worthy borrowers could resist the initiative. But Scott Syphax of the Nehemiah Corp. won't be among them.
"We welcome the program," said Syphax, whose California-based group pioneered downpayment assistance for FHA borrowers seven years ago. "FHA has finally gotten religion."
Some lawmakers also are likely to object. Citing the high default rate among FHA borrowers, the House Appropriations Committee rejected a HUD proposal to lower its qualifying rules to reach more borrowers.
But Weicher said HUD has been working hard to keep late payers in their houses. "We have been addressing our default rate, and we are now able to help half the families who go into default avoid foreclosure," he said.
The department expects a higher default rate on no-downpayment loans because they will carry greater risk. But borrowers will be charged a slightly higher premium to cover the extra costs. After five years, the premium would be reduced to the same rate paid by other FHA borrowers.
"We do not anticipate any costs to taxpayers," the HUD official told reporters at the builders conference.
Borrowers would have to meet the same underwriting requirements as those who make a downpayment. But they would be required to participate in pre-purchase counseling.
They also would still have to have enough cash to cover closing costs, which range from two percent to five percent of the loan amount, depending on where the house is located.