Expanding Homeownership Opportunity II: The SoftSecond Loan Program, 1991-2006

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Campen, Jim
homeownership; SoftSecond Loan Program; Mortgage Lending Committee of the Massachusetts Community & Banking Council; Massachusetts Housing Partnership; mortgages; Banking and Finance Law; Housing Law; Inequality and Stratification; Social Policy
report description
This report provides data on lending by the SoftSecond Loan Program during the most recent three-year period (2004-2006) as well as over the sixteen-year life of the program. The Mortgage Lending Committee of the Massachusetts Community & Banking Council (MCBC) has had a special interest in the SoftSecond program since its inception and has carefully monitored the performance of its loans. The report updates an earlier report prepared for MCBC by the present author in 2004: Expanding Homeownership Opportunity: The SoftSecond Loan Program, 1991-2003. Detailed information about the origins and evolution of the program, and about the details of its structure and operation, are available in that report and elsewhere and are therefore not repeated here.The SoftSecond Loan Program gets its name from the fact that participating homebuyers receive two mortgages rather than one: a first mortgage for 77% of the purchase price and a second mortgage for 20%; the program requires at least a 3% down payment, at least half of which must come from the borrower’s own funds. Both mortgages are 30-year fixed-rate loans. In the great majority of cases (including all loans in Boston and all loans by the biggest banks), the interest rate on both mortgages is one-half of a percentage point below the bank’s two-point rate, although no points are charged. The second mortgage is “soft” (for the first ten years) in two ways – payments are interest-only (there is no repayment of principal during this period) and payments may be further reduced, for qualifying low- and moderate-income homebuyers, by public subsidies. The state also funds loan loss reserves for each bank equal to three percent of the total value of the second mortgages that the bank has originated. The existence of the reserve fund makes it possible for borrowers to avoid the costs of private mortgage insurance while banks are still protected from credit losses. Affordability is further increased, in Boston and some other communities, by the provision of down payment and other financial assistance from local governments.