Some first-time home buyers will get a break on their downpayments through programs announced Monday by mortgage giants Fannie Mae and Freddie Mac as the firms try to jump-start the housing market by making it easier for more borrowers to get a mortgage.
Fannie and Freddie will soon allow for mortgages with a downpayment as low as 3 percent – instead of the 5 percent currently required -- as long as one of the borrowers on the mortgage has not owned a primary residence within the past three years. The changes take effect Dec. 13 at Fannie, and March 23 at Freddie.
It’s too early to tell how many borrowers will apply for these loans, Fannie and Freddie told reporters Monday. But they also said they expect many lenders to offer them. The Federal Housing Finance Agency, which oversees both companies, said these low downpayment mortgages will probably be a small share of both firms’ overall businesses.
Since the FHFA first signaled its intent to change the downpayment policy, critics have cast the move as a return to the lax lending standards that contributed to the 2008 financial crisis. At the height of that crisis, the government took control of Fannie and Freddie and started pumping taxpayer money into the institutions to keep them solvent.
The companies and their regulator insist that they are in no way encouraging a return to the shoddy lending of the past. They say only creditworthy borrowers who take out plain-vanilla, fixed rate mortgages will qualify for the new programs, and all of them will be carefully vetted to make sure they can pay back the loans.
“These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices,” Mel Watt, FHFA’s director, said in a statement.
Fannie and Freddie do not make loans. They buy them from lenders, package them into securities and sell them to investors. For a fee, they guarantee the mortgages and pay investors if the loans default.
The companies and their regulator are now trying to do their part to help open up access to credit, particularly to low and moderate income borrowers. Since the housing market unraveled, lenders have turned away many potential buyers by demanding unusually high credit scores and imposing other harsh restrictions on government-backed loans.
As many as 1.2 million additional loans would have been made annually since 2012 if normal, pre-housing bubble lending standards had been in place, according to a recent analysis by the nonpartisan Urban Institute. The industry says it doesn’t want to take any chances on people with less-than-stellar credit. After the housing bust, regulators forced lenders to buy back billions of dollars in loans, and the industry said it is merely trying to insulate itself from more financial penalties and lawsuits.
To allay the industry’s concerns, Fannie and Freddie reached an agreement with lenders that would clarify the circumstances under which the industry is required to buy back loans. Fannie and Freddie, along with several industry experts, say that agreement has made lenders more receptive to the idea of granting 3 percent down loans.
“I’m confident that the majority of the lending community is going to take part in these programs,” said David H. Stevens, chief executive of the Mortgage Bankers Association. “They’re more confident about the risks they face in extending these loans.”
These low downpayment loans will compete with the mortgages backed by the Federal Housing Administration, which requires at least 3.5 percent down. In some cases, the Fannie and Freddie loans will be cheaper because the fees on FHA loans have become very high
Both Fannie and Freddie had previously accepted 3 percent downpayment mortgages. Freddie stopped years ago, and it now insists that anyone who takes part in its new program must take borrower education classes. Freddie's initiative is also open to current homeowners of low and moderate income, as defined by the company's rules.Fannie stopped purchasing 3-percent down mortgages in late 2013 though it continued to buy them if they are made through state and local housing finance agencies.
Timothy Mayopoulos, Fannie’s chief executive, has said his company’s long experience with these loans shows that they perform well. The Urban Institute reached the same conclusion after analyzing low downpayment loans backed by Fannie in the recent past.
The analysis found that the default rate for loans with 3 percent to 5 percent down were very similar to the default rates on loans with 5 percent to 10 percent down. It also found that very few borrowers got the lower downpayment loans, and nearly all of those who did had top-notch credit.
Fannie and Freddie only buy loans with less than 20 percent down if they carry private mortgage insurance, so even if some of the 3 percent down loans were to default, taxpayers are not in line to take the first hit. The mortgage insurance companies are.
On Monday, Fannie also said it will allow borrowers to refinance their loans so that they cover up to 97 percent of their home's value under a limited cash-out option. (Previously, 95 percent was the cut off.) It will permit borrowers to pull enough cash out to help pay for the closing costs, either 2 percent of the loan amount or $2,000, whichever is less.