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Editorial: Relaxed mortgage rule will need these safeguards

Mortgage buyer Freddie Mac said Thursday that the

Mortgage buyer Freddie Mac said Thursday that the average rate on the 30-year loan declined to 4.10 percent from 4.13 percent last week. Above, a fore sale sign is seen outside a home in Walpole, Mass., in September. (Sept. 18, 2013) Credit: AP

Home ownership is the foundation of building wealth for most families, so making that first home easier to finance can provide an important toehold in the middle class.

That's the virtue of Fannie Mae and Freddie Mac's recent decision to underwrite mortgages with down payments of 3 percent for first-time home buyers. Previously the two guarantors of most of the nation's mortgage debt bought only loans with at least 5 percent down.

Expanding access to mortgages for people like those burdened with college debt -- those who can afford the monthly costs of ownership but don't have a big pile of cash to put down -- should also provide a small but timely boost for the sluggish housing market.

Nobody wants to return to the sort of dicey mortgages borrowers couldn't afford that inflated the housing bubble and contributed to bank collapses in 2008. Significant equity in a home is a powerful hedge against default, but safeguards with the 3 percent loans will limit risk. Existing credit requirements will not be relaxed. Income will have to be documented. Only vanilla fixed-rate mortgages will come with the 3 percent down payment, not those with low teaser rates and balloon payments that got many borrowers in trouble. The loans will be available only for primary residences. And borrowers will be required to have private mortgage insurance.

When 3 percent loans were available in the past, the default rate was essentially the same as for those with 5 percent down, according to Fannie Mae. Still, borrowers at 3 percent will now be required to complete a buyer-counseling program.

Expanding the opportunity to own a home isn't completely risk free. But it's worth it.