WASHINGTON – Feb. 7, 2013 – Housing advocates are pushing for a new type of subprime loan, called the “Dignity Mortgage,” for applicants with lower incomes or bad credit.

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 rebuilt their finances after losing their job and their home about four or five years ago, and who have taken steps to repair their credit scores in that time, says Faith Bautista, head of the National Asian American Coalition.

The dignity loan would apply to people who have found new jobs and saved a 10 percent downpayment, 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 could pay 1.25 percentage points above more creditworthy borrowers (e.g. 4.75 percent if creditworthy borrowers were paying 3.5 percent). However, the loan could also have a clause the rewards homeowners with better terms if they make payments on time for five years.

“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 downpayments were charged at the time the loan was made,” the Los Angeles Times reports.  

Source: “New Type of Subprime Loan Pushed,” Los Angeles Times (Jan. 29, 2013)

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