Bank of America and Fannie Mae are upping the ante on low-down payment loans.
The San Francisco bank announced it would loosen terms on its 3%-down loans-the lowest down payment loans commonly made by mortgage lenders and purchased by secondary-market agencies.
Under the new program, low-income borrowers may use gifts or grants for a third of the down payment, or 1% of the home value.
The loan's terms also allow borrowers to use more of their income for mortgage payments, so they'll need less income to qualify.
Fannie Mae, formally the Federal National Mortgage Association, will buy the loans.
Brenda Taylor, vice president of BankAmerica Mortgage, said the bank was confident that the new loans, like other affordable mortgages, would perform well.
The bank is making up for the new flexibilities by tightening credit standards on two other fronts. Borrowers will be required to have cash reserves equaling two months of mortgage and insurance payments, versus the one month required for the standard 3% down program.
The loans will also be more heavily insured, Ms. Taylor said.
Loans with low down payments, which have proliferated in recent years, have higher delinquencies, according to Fannie Mae, Freddie Mac, formally the Federal Home Loan Mortgage Corp., and mortgage insurers.
Bank of America, however, has steadfastly maintained that its portfolio of affordable-housing loans don't show the same performance problems.
Ms. Taylor made that point again last week. "We're not seeing that much difference in their performance. What we're seeing is very good," she said.
In a press release, Arthur D. Ringwald, group executive vice president of BankAmerica Mortgage, said he expected the new 3%-down loan to "generate important new business in many key markets."
Building market share has been one of BankAmerica Mortgage's key goals, and the bank is projecting it will originate $400 million in loans in the first few months of the program.
For a limited time, the bank will also waive $1,000 in fees to make the loans more affordable.
Ms. Taylor said the bank would provide early delinquency counseling to help ensure that borrowers under this program hang on to their homes. GE will provide the counseling for free to borrowers.
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Eastern Mortgage Services, Trevose, Pa., announced it was offering mortgages of up to $200,000 with no down payment and no mortgage insurance.
The loans are 30-year fixed-rate mortgages for purchase of a home that will be occupied by the buyer.
Borrowers will be able to use gifts to pay closing costs.
Richard Payne, president of Eastern, said the small cash requirement and high tax deductions should appeal to homebuyers.
He added that first-time homebuyers with good credit but little cash would find the program attractive, along with homeowners who want to trade up to a larger home but do not have enough equity.
Closed loans will be sold to investors, a spokesman said.
