Fannie Mae, Freddie Mac Will Soon Back 3% Down Mortgages


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Two slightly different programs may spur increases in home-ownership

Recently, housing finance giants Freddie Mac and Fannie Mae announced plans to back mortgages with down payments as low as 3 percent. They say this latest move to open up more access to home-ownership will have measures in place to protect against abuses which led to the subprime housing market crash.

See New Mortgage May Increase Home-Ownership Rate

The GSEs will only back fixed-rate mortgages on single-family homes that will be the borrower’s primary residence. Full documentation on the ability to repay the mortgage would be required said officials from Fannie Mae and Freddie Mac and the Federal Housing Finance Agency (FHFA).

“Our goal is to help additional qualified borrowers gain access to mortgages,” said Andrew Bon Salle, Executive Vice President for single family underwriting, pricing and capital markets at Fannie Mae.

He said, “We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers.”

According to the housing finance giants’ officials, the program was designed to help borrowers with low or moderate incomes, who are credit-worthy and can demonstrate the ability to repay a mortgage, but lack the money needed to make a 5 percent down-payment.

See Remaking HUD

Freddie Mac and Fannie Mae’s programs will be different. Freddie Mac’s program, called Home Possible Advantage, will be limited to mortgages for first-time homebuyers. Borrowers will have to purchase private mortgage insurance and must participate in a homebuyer counseling and education program before getting the loan. Refinancing is available under the program, but the borrower wouldn’t be able to take any cash out of the refinance.

“Home Possible Advantage gives qualified borrowers with limited down payment savings a responsible path to home ownership and lenders a new tool for reaching eligible working families ready to own a home of their own,” said Dave Lowman, Freddie Mac’s executive vice president of single-family business.

The Fannie Mae program will be available to anyone who has not owned a primary residence for three years and while private mortgage insurance will be required, housing counseling and education will not. Fannie Mae backed mortgage holders would be allowed to take out up to $2000 to cover closing costs but will not be allowed to remove equity from their home.

Some lenders are hesitant to support low down-payment loans because they were part of the relaxing of lending standards which helped to drive home prices to unsustainable levels; in addition to the higher default risk. One critic, Jeb Hensarling, R-Texas, House Financial Services Committee Chairman, said he was “extremely concerned” about taxpayers backing “high-risk mortgages with ultra-low down payments. Such loans are inherently risky because the borrower has almost no financial cushion against a personal or economic downturn, vastly increasing the likelihood they will walk away from the loan once it gets significantly underwater,” he said.

The critics’ fears are well founded. In 2008, Fannie Mae and Freddie Mac were seized by the government as they stood on the precipice of bankruptcy as a result of backing too many bad mortgages. They returned to profitability after an infusion of $187.5 billion from taxpayers and the housing market rebounding. All of the taxpayer funded bailout was paid back this year.

“The idea that you can get a mortgage with just 3 percent down is something that can get us back into bubble territory,” Russell Goldsmith, chairman of City National Corp. in Los Angeles, said in a recent interview with The Times.

The FHFA said that the new low down-payment loans would consist of a small percentage of the Fannie Mae and Freddie Mac loan portfolios and they did not have an estimate of how many borrowers would take advantage of the programs.

Watts said the low down-payment programs are equipped with strong underwriting standards which “provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.”



Los Angeles Times. Fannie Mae, Freddie Mac detail plans for 3% down-payment mortgages

Fannie Mae. Access to Mortgage Credit



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