The nation’s largest source of home loan money--giant investor Fannie Mae - -is developing two programs that could provide mortgage borrowers with major new consumer protections against what the corporation calls “financial meltdowns.”

The new loans, expected to be introduced through participating lenders within the coming year, are dubbed “Home Manager” and “Home Stay.” The first would graft a home warranty plan onto borrowers’ mortgages. The warranty would insure key mechanical and structural elements of a borrower’s house against costly breakdowns. For instance, a purchaser or refinancer who took out a Home Manager loan might be insured against unexpected repair costs connected with the existing roof, the foundation, electrical system, heating and air conditioning, water and sewage, etc. Specific details of the warranty coverage and costs are still being fine-tuned, according to Fannie Mae officials, but the net effect will be to shield a borrower from sudden cash-flow crises triggered by major repair costs.

Backing up the new warranty system, say Fannie Mae officials, will be a nationwide network of local and regional service providers. A home buyer with a new Fannie Mae Home Manager loan will be able to choose among several alternative local companies to provide the repairs or other work covered by the warranty plan.

The second program under development is designed to help homeowners stay current on their mortgage payments, even when they’ve suffered an unexpected, major loss of income because of unemployment, sickness, divorce or death. The Fannie Mae “Home Stay” program will allow borrowers to skip up to six months worth of mortgage payments when necessary because of job, health or marital issues. The plan will involve insurance coverage for the missed payments, and therefore will not require borrowers to ever repay the arrears.

Say you lose your job and can’t pay your $2,500 a month in mortgage principal, interest, taxes and insurance. Under the new Fannie Mae concept, your mortgage would essentially pay for itself for as long as six months--$15,000 worth of payments--with no penalties to you.

As with the Home Manager program, Fannie Mae officials emphasized that the cost and format of the Home Stay program are still being worked out. Under one alternative, for instance, borrowers might pay a modest fee up front--a separate add-on or a fee rolled into the mortgage and financed--to obtain the new insurance coverage. Given Fannie’s huge size and geographic reach, insurance industry experts say it could contract with underwriters to provide coverage at minimal expense to borrowers-- $100 to $200 a year per customer, according to one knowledgeable insurance executive.

A Florida-based insurance company, Mortgage Payment Protection Inc., already markets a six-month job-loss backstop plan through mortgage brokers, home builders and realty agents. The cost varies, but often is less than $200 to the consumer for the first year. Some builders and brokers absorb that cost themselves or add it to the borrower’s loan fees. Renewal rates for subsequent years are higher, and must be paid directly by the borrower. The Florida company’s plan is limited to job-loss-related coverage alone.

Fannie Mae officials say their two loan new programs were prompted by consumer polling and focus group research indicating that prospective home buyers--especially minorities and recent immigrants--rank unexpected “financial meltdowns” as their number one fear connected with homeownership.

Published: July 29, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.