Fannie Mae,
Freddie Mac and their regulator provided details on Monday for a low down-payment mortgage program, which could open homeownership to thousands of cash-strapped borrowers.
The mortgage-finance companies and the Federal Housing Finance Agency said borrowers could be able to get mortgages with down payments as little as 3%, but noted that the loans will be available only to first-time buyers, buyers who haven’t owned a home for at least a few years and those with lower incomes.
Many of the loans will also require borrowers to undergo home-buyer counseling before making a purchase.
Fannie’s low down-payment loan program and Freddie’s program will have slightly different requirements. Officials at both companies said the 3% down-payment loans could be made to borrowers with credit scores of as low as 620, which is the standard minimum, if they had other factors to mitigate their risk, such as lower debt-to-income ratios or high reserves.
Fannie said its program will be limited to borrowers who haven’t owned a home in the past three years. Freddie’s program will generally be available to borrowers who don’t make more than their area’s median income.
Freddie’s program “gives qualified borrowers with limited down payment savings a responsible path to homeownership and lenders a new tool for reaching eligible working families ready to own a home of their own,” said Freddie Mac executive Dave Lowman.
Fannie’s program goes into effect almost immediately, while Freddie’s won’t be available until March. An FHFA official in a call with reporters said that because lenders generally take some time to adapt to new guidelines, they don’t expect the new low down-payment mortgages to be widely available until the end of the first quarter of next year.
Mel Watt, who heads the FHFA,
first announced the new program in October along with other changes that some banks say will make it easier for them to make loans. The new program was lauded among some lenders and analysts who have said that mortgage availability has been too limited over the last couple of years.
In a statement, Mr. Watt said that the guidelines “provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.”
Critics have expressed concern that mortgages with low down payments could expose borrowers, Fannie and Freddie to some of the risks that precipitated the financial crisis. If home prices drop, homeowners with a small amount of equity in their homes can quickly owe more than their homes are worth.
Still, even those homeowners don’t necessarily default. According to the Urban Institute, about 0.4% of borrowers in 2011 who made down payments of 3% to 5% have defaulted, no worse than borrowers who made down payments of 5% to 10%.
Fannie and Freddie don’t make loans, but buy them from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default.
Both companies already guarantee loans with down payments of as little as 5%. Those mortgages, as with the new 3% down payment mortgages, require borrowers to pay for private mortgage insurance.
It isn’t yet clear how popular the new down-payment programs will be. Borrowers can already get mortgages with down payments of as little as 3.5% through the Federal Housing Administration, though the costs of such loans have increased markedly over the past few years.
Fannie and Freddie officials said that they expect the low down-payment loans they guarantee to be cheaper than FHA loans for borrowers with higher credit scores. An FHFA official said that they expected the new loans to be a small proportion of the companies’ business.
“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,” said Fannie Mae executive Andrew Bon Salle.
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