A group of housing activists are approaching bankers and federal regulators proposing the new type of loan.
But it’s not winning over too many big-name fans. American Enterprise Institute Fellow and former Fannie Mae executive Edward J. Pinto called the Dignity Mortgage proposal “a stupid and crazy idea—a poison pill… Haven’t we learned anything from the cratering of our housing finance system?”
The Dignity Mortgage would be geared to applicants who have rebuilt their finances since losing their job and their homes about four or five years ago and who have taken steps to repair their credit scores in that time, says Faith Bautista, who heads the National Asian American Coalition.
The new loan would be for those who have since found new jobs and saved up for a 10 percent down payment, but who may still struggle to qualify for a loan, Bautista says. Since it would be a subprime loan, it would come with a higher rate for a higher risk. For example, borrowers would pay 1.25 percentage points above more creditworthy borrowers (e.g. 4.75 percent if creditworthy borrowers were paying 3.5 percent), the Los Angeles Times reports.
However, if borrowers made timely payments for five years, the deal could improve.
“At that point, the extra money they had paid in interest would be used to reduce the mortgage balance, and their rate would be cut to whatever borrowers with sterling credit and 20 percent down payments were charged at the time the loan was made,” the Los Angeles Times reports in explaining the proposal.