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Wisconsin is one of just three states participating in a controversial new federal program offering mortgages for as little as $1,000 down. Critics say the program is a repeat of liberal lending practices that led to the housing crash – but the state housing authority says the program’s safeguards are strong enough to prevent homebuyers from getting in over their heads.

The loan program is the first offered by the Wisconsin Housing and Economic Development Authority since October 2008, when frozen credit markets put a stop to the agency’s affordable lending efforts. Its new program, dubbed the WHEDA Advantage, was the first in the nation to take advantage of the federal Affordable Advantage program when it launched in March.

Since then, WHEDA has lent about $52 million to help finance about 450 mortgages, according to Kate Venne, WHEDA spokeswoman. The authority, created in the 1970s by the state Legislature, has about $3 billion in assets and funds its investment in the mortgages by selling bonds that are bought up, primarily, by the U.S. Treasury through Fannie Mae, the “government-sponsored” mortgage company.

Technically, she says, the 30-year, fixed-rate mortgages require no money down – but the loans require the borrower to make a “minimum borrower contribution” of at least $1,000. Those borrowers must also have at least a “good” credit score (680 or higher) to get full financing of the home.

The mortgages are designed for low and moderate-income people who lack the savings to foot a down payment, often a major barrier to home ownership. But critics say the loans are a step backward in lending policy.

“The logic of a down payment is you have to get over a hurdle. We don’t want it to be impossible, but you have to have some savings, some discipline,” says Dean Baker, co-director of the national Center for Economic and Policy Research. He argues that Affordable Advantage loans could lead lenders and borrowers to repeat mistakes made earlier in the decade.

“The housing bubble and crash got a lot of people in houses they couldn’t afford,” Baker says. “You had a lot of people who put nothing down.”

Without a down payment, he adds, borrowers can easily go “underwater” on the loan, meaning they owe more to the lender than the house is worth. Without the equity created by a down payment to act as a cushion, a slight dip in the home’s value could take the loan underwater.

Baker says Affordable Advantage loans could do more harm than good. “Did they not see what happened? I thought we all agreed with the housing bubble we had gone too far,” he says.

Venne responds: “Our loans generally perform incredibly well, and these loans have strict underwriting requirements.” She says not one of the 450 mortgage loans has defaulted to date. In the past, she adds, WHEDA loans have averaged a default of 1.25 percent of all loans, compared to 1.8 for conventional, privately financed mortgages. What shut WHEDA down for awhile, she adds, was the collapse of the markets where WHEDA sold its bonds. “We couldn’t get access to capital.”

Borrowers are rigorously vetted, required to buy six months of job-loss insurance covering their payments and must attend between 6 and 8 hours of home ownership classes. To keep fees low, however, WHEDA’s not requiring borrowers to take out private mortgage insurance.

They also must be buying their first home or one in a targeted area of the state – which includes large areas of Milwaukee.

Barry Zigas, director of housing policy for the Consumer Federation of America, says the loans are a valuable alternative to borrowers with good credit and steady income but not enough savings for a full down payment, which is often as much as 20 percent. “It can be a big obstacle,” he says, but adds that zero-down mortgages can be dangerous. “These do have higher risks,” he says.

The national Affordable Advantage program, created by Fannie Mae and the National Council of State Housing Agencies (of which WHEDA is one), is also being offered in Massachusetts and Idaho. A few other states offer similar programs but are not participating in the federal one, according to The Washington Independent, one of a chain of non-profit online publications.

In Congress, the publication says, Republicans have proposed legislation to set a minimum down payment of 5 percent. Lawmakers pushing for stricter down payment regulations also got up in arms when the Federal Housing Administration proposed allowing borrowers to put the $8,500 first-time homebuyer tax credit toward their down payments, arguing that would mean the buyers had “no skin in the game,” the story says.

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