The regulator that oversees Fannie Mae and Freddie Mac is considering policy changes that aim to make credit more readily available to potential home buyers, many of whom have been shut out of the market by the stiff lending requirements put in place in the aftermath of the housing bust.
The Federal Housing Finance Agency is discussing whether the two mortgage giants should lower their down-payment requirements from 5 percent to 3 percent in some cases, according to people familiar with the matter who asked not to be named because they were not authorized to speak about it. Freddie scrapped the 3 percent minimum a few years ago, and D.C.-based Fannie did the same more recently.
The boost in down payments was part of a broader initiative to shrink the government’s role in the mortgage market — a push that the FHFA abandoned after Mel Watt took over as its leader this year. Watt has said his agency no longer plans to have the government-controlled companies retreat from the housing market, asserting that Fannie and Freddie must help keep home loans flowing to the public.
The FHFA also is mulling changes that it hopes will prompt lenders to ease their standards. After the housing market tanked, Fannie and Freddie forced the industry to buy back billions of dollars in loans. In response, lenders began demanding unusually high credit scores and imposing other tough standards on borrowers — exceeding the government’s own criteria — in a bid to insulate themselves from financial penalties. Lenders say they have no incentive to let up because the rules governing when Fannie and Freddie can take action against them are unclear, an issue the FHFA plans to address, the knowledgeable people said.
Watt plans to outline some of the proposed changes in a speech Monday at the Mortgage Bankers Association conference in Las Vegas. It’s unclear how specific he will be about his plans, or whether any of the changes will take effect soon.
The regulator’s decisions about Fannie and Freddie have huge sway over the mortgage market and, by extension, home buyers. Fannie, Freddie and the Federal Housing Administration collectively own or back nearly half of all U.S. mortgages.
None of them makes loans. Fannie and Freddie buy loans that meet their guidelines from lenders, package the loans into securities and sell them to investors. For a fee, they guarantee the mortgages and pay investors if the loans default.
The FHFA is an independent agency that operates without direction from the White House. But the White House has been beating the drum on widening access to credit for months now and has met several times with industry executives — most recently this week — about the issue, people familiar with the matter said.
Experts who track the mortgage industry are skeptical that the proposals, which were first reported in the Wall Street Journal, are dramatic enough to ease lenders’ concerns and open up credit in a significant way.
For starters, even when borrowers were required to put down only 3 percent, lenders usually required more, said Guy Cecala, publisher of Inside Mortgage Finance. “So the question is: If they lower the down-payment requirement, is anybody going to pay attention?” he said.
Any talk of lowering down payments or laying the groundwork for borrowers with lower credit scores to enter the market is likely to ignite opposition on Capitol Hill, where Republicans in particular have repeatedly warned that loosening credit requirements could lead to another housing meltdown.
Jaret Seiberg, an analyst with Guggenheim Securities, reacted to news reports about the proposed changes in a note to clients. There is no evidence yet, he said, that the changes would be “the game changers needed to get banks to take more risk.”