As policymakers look for ways to expand homeownership, they face the following questions:

What if the government creates a mortgage program in which one in six borrowers eventually lose their homes to foreclosure? Is their pain outweighed by the benefits to the five in six who are able to keep their homes? What if almost one-third of the borrowers in the program eventually lose their homes?

Congress confronts these issues as it ponders whether to allow the Federal Housing Administration to insure zero-down-payment mortgages. Right now, FHA-insured mortgages require a down payment of at least 3 percent for most borrowers. To boost homeownership among minorities and immigrants, the Bush administration has asked Congress to allow the FHA to insure mortgages with no down payment for first-time home buyers.

Zero-down loans could carry a lot of risk. FHA commissioner John Weicher told the House Financial Services Committee that, over the life of the loans, 17 percent of zero-down borrowers -- about one in six -- would be foreclosed on or be forced to sell their homes at a loss. In contrast, the estimated cumulative default rate for all FHA loans originated this fiscal year is 6.96 percent.

More foreclosures: Good policy?
If the 17 percent estimate is accurate -- and no one knows yet if it is -- such a foreclosure rate would be too high to make the zero-down program good policy, says Nicholas Retsinas, an FHA commissioner during the Clinton administration and now director of the Harvard Joint Center for Housing Studies. "Once you get into the double digits, I have some reservations."

Not everyone has the same reluctance to make mortgages available to people who can't save enough for a down payment, even at the cost of extremely high default rates.

"There is no free lunch," says Scott Syphax, president of the Nehemiah Program, a Sacramento-based nonprofit agency that provides down-payment assistance to home buyers. "The debate has never been joined as to how far American society is willing to move out onto the risk curve in order to increase family prosperity for all of the low-income and minority families that everyone enjoys standing next to in their photo opportunities."

Perhaps the debate will be joined now. The nonpartisan Congressional Budget Office has issued a gloomier forecast than the FHA's, estimating that 30 percent of zero-down borrowers eventually would lose their homes.

Undaunted by these predictions, the Financial Services Committee has recommended that the full House pass the proposed zero-down program, H.R. 3755, and send the measure to the Senate. Under the bill approved by the committee, first-time home buyers would be able to get FHA-insured mortgages for more than 100 percent of the house's value. They could buy the house without making a down payment, and could finance closing costs, too (probably up to 3 percent of the home's price). Zero-down borrowers would pay more for mortgage insurance than buyers who put up 3 percent -- about $50 a month more on a $100,000 loan, Weicher estimates.

The FHA doesn't lend money, but it insures mortgages of people who borrow from private-sector lenders. When those homeowners are foreclosed upon, or have to sell their homes for less than they owe, the FHA insurance fund reimburses the lenders for their financial losses. Credit standards for FHA-insured mortgages are more lenient than for conventional mortgages.

Taxpayers could foot the bill
The FHA takes in more money in mortgage insurance premiums than it pays out to lenders. That would continue to happen under the proposal before the House, FHA administrator Weicher told the finance committee in a letter. In contrast, the Congressional Budget Office estimates that FHA mortgage insurance claims would exceed premiums by $500 million over the first four years of the zero-down program. The shortfall probably would have to be covered by taxpayers.

When the House committee held a hearing on the zero-down program in March, at least two witnesses made the point that the FHA has, in effect, been insuring zero-down loans for years. About one-quarter of FHA loans today are to borrowers who receive the down payment money as a gift, usually from nonprofit down-payment-assistance programs such as Nehemiah, AmeriDream and Neighborhood Gold.

These nonprofit corporations and the federal Department of Housing and Urban Development disagree about the risk involved in the loans. HUD, using one set of data, insists that mortgages with down-payment assistance have higher default rates, and the nonprofits, using other data, argue that the default rates are about the same as for all FHA loans.

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