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Zero-down mortgage initiative by Bush is hit

Budget office says plan likely to spur more loan defaults

President Bush's weekend campaign promise that he will push legislation allowing for no money down on some federally insured mortgages could cost taxpayers as much as $500 million over four years because of a higher rate of defaults, according to the Congressional Budget Office.

The election-year idea may appeal to those who can't save as fast as home prices are rising. But some financial planners warn that increasingly common no- and low-down-payment programs can be ruinous for some consumers -- especially if home values decline.

If housing prices fall, consumers with little or no money of their own invested in the home are more vulnerable to ending up with mortgages larger than the value of the house.

And those who can't afford large down payments usually don't have enough savings to serve as a cushion if someone in the household gets sick or is laid off.

"If you're really stretching, maybe you should back off and look at a less expensive house," said Joan Gray Anderson, a professor of family financial counseling at the University of Rhode Island.

Bush proposed zero-down-payment legislation earlier this year. The Congressional Budget Office has contended for months that the proposal would generate huge losses, an assessment that could be a stumbling block for the bill's passage. But the Department of Housing and Urban Development thinks the program could be run on a break-even basis.

Bush contends that reducing the required 3 percent down in the Federal Housing Administration mortgage program to zero down would help 150,000 first-time buyers in the first year. Homeownership rates are now about 69 percent nationwide, compared to about 64 percent 10 years ago. The FHA insures many private-lender home loans.

"To build an ownership society, we'll help even more Americans to buy homes," Bush said in an Ohio speech to home builders. "Some families are more than able to pay a mortgage but just don't have the savings to put money down."

A spokesman for the campaign of Senator John F. Kerry said the plan will help "relatively few families." Kerry's emphasis is on preserving affordable-housing programs that he says Bush has slashed.

Meanwhile, low- and no-down-payment mortgages are available to more people than in the past. A 30-year fixed-rate mortgage with a 20 percent down payment is one of many options available today. Home buyers are making smaller down payments on a percentage basis, and sometimes choosing adjustable-rate mortgages or obtaining two mortgages on a purchase.

According to a 2003 survey by the National Association of Realtors, the median down payment for a first-time home buyer equaled 6 percent of the purchase price.

Several factors account for the reduced popularity of the traditional 20 percent down payment. In recent years, homes have been appreciating in value by about 10 percent annually, said Denise Leonard, incoming president of the Massachusetts Mortgage Association and a senior vice president at Constitution Financial Group, a mortgage lender in Wakefield. Such rapid appreciation helps to protect lenders in the event of delinquencies, she said.

Meanwhile, rising home prices, and rising rents, make it harder for first-time buyers to scrape together a down payment. The mortgage industry has responded by offering more flexible products, Leonard said. The industry takes steps to ensure that these products go only to consumers who can show they have a good history of managing credit.

"You can't get these products if you're not creditworthy," she said.

But in Boston and Providence, said URI's Anderson, even with no-down-payment mortgages, high prices can keep homes out of reach.

"There are not a lot of entry-level homes in these markets," she said.

The Neighborhood Assistance Corporation of America, a Boston-based nonprofit advocacy group that provides housing services, has been a pioneer in no-down-payment mortgages, offering them for a decade to working-class consumers, said chief executive Bruce Marks. The group came in for early criticism, he said, because of a belief that consumers needed to have a financial stake in a new home.

The group's no-down-payment mortgages are similar to those the federal government offered to veterans after World War II, Marks said, and its track record shows that such loans are unlikely to be defaulted on.

MassHousing, the state's affordable-housing bank, has had a similar experience in the two years it has been offering loans with no down payment, said executive director Tom Gleason. They've performed well in a strong housing market and are likely to be "common in the future," he said.

An unanswered question remains, he acknowledged: "We have no experience of how these loans will perform when the market is weak."

Chris Reidy can be reached at reidy@globe.com.

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