Bank of America’s test plan is rolling out in Los Angeles, Dallas, Detroit and Charlotte and aimed at predominantly minority neighborhoods in those cities. It offers loans to minority buyers without the need for a down payment, closing costs or private mortgage insurance (PMI), an extra cost that’s customary for buyers who put down less than 20% of the home’s purchase price.
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However, critics of the program were quick to point out that it could backfire and potentially harm the communities it’s designed to help.
The 2008 housing crisis — which was heavily driven by risky loans to unqualified buyers — taught tough lessons to lenders who were stuck with foreclosed homes after buyers stopped making payments on properties they were never able to afford.
The consequences were devastating: Lenders inherited foreclosed homes and buyers saw their credit scores sink.
It’s likely that at least some of the borrowers under Bank of America’s new program would be considered “subprime” under ordinary lending rules — recalling the ugliest days of the 2008 crisis and supplying critics with easy talking points. Credit agency Experian, for instance, considers borrowers with credit scores between 580 and 669 as subprime.
And while credit scores aren’t always an accurate barometer of a buyer’s purchase power or ability to make timely payments, advocates worry the interest rates required to make up for the low bar the lender is setting could set minority buyers up for failure.
At least this time the Clinton AG isn't here to issue threats of legal action against lenders who don't take the risk of sub-prime mortgage loans.