GE Capital Mortgage Insurance is teaming up with a nonprofit group to enable consumers with clean credit records to buy homes with no money down.
Under the new program, the National Association of Housing Partnerships puts its own money at risk and provides counseling services to the borrower, to mitigate the risk to the General Electric Co. unit.
Lenders have long toyed with the concept of providing mortgages without equity. Down payment requirements have served as a barrier to homeownership, "and they don't work to keep people in a home," said Kirk G. Willison, senior vice president at Countrywide Home Loans.
But 100% home financing is tricky, because the extra risk has to be absorbed somehow. Fannie Mae and Freddie Mac will not buy loans with less than 20% down unless they come with mortgage insurance. And mortgage insurers are prohibited in most states from insuring loans with less than 3% down.
In GE's program, the nonprofit group will guarantee the first 3% of the loan. If loans fall 20 days past due, GE will immediately notify the group through the Internet, so it can intervene. To compensate, NAHP gets an up- front 50-basis-point fee from the lender and an annual service fee from GE.
"We regard this risk as considerably better than a normal 97% loan-to- value," said Mark Goldhaber, vice president of affordable housing at GE Capital Mortgage Insurance, citing the borrowers' high credit scores.
Nevertheless, the borrower pays an insurance premium 6 basis points higher than what is normally charged for a 97% loan-to-value loan, so GE can in turn pay the NAHP's fee.
Because of the nonprofit group's role as a credit counselor, "If the borrower does get into trouble they will view NAHP as a welcome help, not another phone call to dodge," Mr. Goldhaber said.
Thomas Bledsoe, president of the NAHP, expects that $500 million of loans will be originated under the new program this year, and that once it is in full swing, volume will be $1 billion per year. So far Countrywide is the only lender to sign up.
Bear Stearns and another GE unit, GE Capital Mortgage Services, will buy and securitize the loans originated in the new program. Fannie and Freddie will not, but GE executives say they are hopeful this will change.
GE's insurance unit rolled out a similar zero-down program last year, in which the riskiest 3% is held by an affiliate of the lender. But that did not work for Countrywide and other mortgage banks, which are reluctant to hold loans in portfolio, Mr. Willison said.