“Some studies have shown that moving from a 5% down payment to a 3% down payment doesn’t result in many more defaults. About 0.4% of borrowers in 2011 who made down payments of 3% to 5% on loans backed by Fannie Mae have defaulted – no more than borrowers who made down payments of 5% to 10%, according to the Urban Institute.”, Wall Street Journal
“This is too short a period of time to be statistically valid and also a period of time in which housing prices were mostly rising (and significantly). That said, I agree there is really not much difference between putting 3% down and 5% down. But making this point is like saying, “there isn’t much difference in health risk from smoking four packs a day or six packs!!!!” Look, any down payment below 20% is risky and down payments below 10% are very risky. This goes to our federal/national housing policies. Maybe we want Americans to take this risk on, given the upsides of homeownership for individual wealth building and the economy? However, I think these low-down-payment government mortgages are just too big a risk unless there is an expectation that home prices are likely to rise (and not fall) in the first 3 to 5 years of homeownership. Also, I think it’s important for low-down payment borrowers to genuinely be first-time home buyers, who are relatively young and near the beginning of their work-life, because their incomes are more likely to rise over the years (making the mortgage payment easier to handle over time). Unbelievably, these two very important issues are NOT even addressed in lending guidelines and underwriting practices. If it’s not the case, then let’s call a spade a spade; this relatively risky U.S. housing/mortgage finance policy is designed to support the industry and economic activity, not individual American homeowners. As part of a new business idea I am working on, I have studied the last 22/23 years of home price data from the U.S. government (FHFA data). Nationwide, there were five years (22% of the time) of home price depreciation averaging a negative 4% a year; -8.4% in the worst year. In my L.A. MSA, there were 10 years (46% of the time) of home price depreciation averaging a negative 7.1% per year; -25.3% in the worst year. Is it really prudent for Fannie Mae and other government sponsored entities to be encouraging homeowners to buy homes in say L.A., with just 3% down (and a mortgage), if they don’t think it’s highly likely housing prices are going to be rising, rather than falling? Regarding the new 3% down payment (and 620 FICO score!) program, when FHFA Director Mel Watts says that “these underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices”; with all due respect, I think he is another liberal politician who really does not have the experience or expertise to make that statement or these judgments (or even be in charge of FHFA) and after the taxpayers bailed out Fannie and Freddie to the tune of $180-something billion (they are still in government conservatorship!), why would he and his agency alone (which supervised Fannie and Freddie pre-crisis and made incorrect public assurances of their soundness) be able to make this important decision and not Congress? Finally, could it be any clearer that it is our own well-intended government that always leads the private lenders down the path of lower mortgage lending standards and increased risk? (Happily I admit, because they can’t help themselves. Loan volumes equals profits, until housing prices decline. There was an excuse pre-crisis, because the Fed’s Greenspan assured us all this was likely to never happen nationwide, without a Great Depression. And then it did. There is no excuse for private lenders to delude themselves of this real risk today.)”, Mike Perry, former Chairman and CEO, IndyMac Bank
“We should have learned from past experience that this is incredibly dangerous,” said Anthony Sanders, a finance professor at George Mason University. “Down payment matters, big time, and we’ve always known this.”, Wall Street Journal
“Mark A. Calabria, an economist at the libertarian Cato Institute, was not as sanguine about the financial stability of the targeted borrowers. Given closing costs, he said, “You’re essentially underwater when you walk away from the table.”“That is not a situation we should be trying to get people in,” he said., New York Times
Fannie, Freddie and FHFA Detail Low Down-Payment Mortgage Programs
Borrowers Could Get Mortgages With Down Payments as Little as 3%
Programs would offer home mortgages with as little as 3% down. Bloomberg News
By Joe Light
Mortgage-finance companies Fannie Mae and Freddie Mac on Monday provided details of new low-down-payment mortgage programs that could reduce costs for first-time and lower-income home buyers, providing a boost to a segment largely absent from the housing market for the last few years.
The mortgage-finance companies and their regulator, the Federal Housing Finance Agency, said the companies would start to back mortgages with down payments of as little as 3%, and that the loans would be available to first-time home buyers, borrowers who haven’t owned a home for at least a few years and to those who have lower incomes.
“When we survey consumers, they say the biggest obstacle to home ownership is saving for the down payment. That’s particularly true for young people,” said Jed Kolko, chief economist for the residential real-estate website Trulia Inc.
The new loans could be most popular among high-credit-score borrowers who might have otherwise had to resort to pricey mortgages backed by the Federal Housing Administration.
The programs also could fuel critics who say the low down payments hark back to the loose lending standards of the housing boom.
Borrowers who get loans guaranteed under the new programs would have to meet criteria that offset the increased risk, such as high reserves or lower debt-to-income ratios, said officials at Fannie, Freddie and the FHFA.
“This will be particularly helpful to those who are strapped by wealth rather than credit challenges,” said Jim Parrott, a senior fellow at the Urban Institute and a former housing-policy adviser in the Obama administration.
Both companies said the programs could be available to borrowers with credit scores of as low as 620, which is the current Fannie and Freddie minimum for other loans.
In a statement, FHFA Director Mel Watt said that the guidelines “provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.”
Fannie and Freddie don’t make loans. They buy them from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default.
Fannie and Freddie already guarantee loans with down payments of as little as 5%, and those loans, as with those under the new programs, require borrowers to buy private mortgage insurance. Many of the loans also will require consumers to get home-buyer counseling before making a purchase.
Mr. Watt first announced that Fannie and Freddie would guarantee 3% down payment loans in October, though he didn’t provide details of who would be eligible.
The new details reveal that the programs will be more limited than some might have hoped, but still could open the market to borrowers who couldn’t afford to make a 5% down payment or to pay the hefty premiums charged by the FHA.
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 prices drop, homeowners with a small amount of equity in their residences quickly could owe more than their residences are worth.
“We should have learned from past experience that this is incredibly dangerous,” said Anthony Sanders, a finance professor at George Mason University. “Down payment matters, big time, and we’ve always known this.”
Some studies have shown that moving from a 5% down payment to a 3% down payment doesn’t result in many more defaults. About 0.4% of borrowers in 2011 who made down payments of 3% to 5% on loans backed by Fannie Mae have defaulted—no more than borrowers who made down payments of 5% to 10%, according to the Urban Institute.
Fannie and Freddie’s low down-payment programs will have slightly different requirements. Fannie’s program will be limited to borrowers who haven’t owned a home in the past three years. Freddie’s program generally will be available to borrowers who don’t make more than the median income in their area.
Fannie’s program will go into effect almost immediately, while Freddie’s won’t be available until March.
Lenders generally take a while to adapt to new guidelines, so an FHFA official said they don’t expect the new low-down-payment mortgages to be widely available until the end of the first quarter of next year.
Mr. Watt 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 programs were lauded among some lenders and analysts who have said that mortgage availability has been too limited in the last couple of years.
It isn’t yet clear how popular the new down payment programs will be. Borrowers already can get mortgages with down payments of as little as 3.5% through the FHA, though the costs of such loans have increased markedly during the last few years.
John Councilman, president of the Association of Mortgage Professionals,said the new programs’ uptake will depend on how cheap they end up being relative to the FHA.
He said that the Fannie and Freddie-backed loans could be most popular among borrowers with relatively high credit scores. “I’d assume that this would skim off the cream of the crop,” he said.
Fannie and Freddie officials said they expect the low-down-payment loans they guarantee to be less costly than FHA loans for borrowers with higher credit scores. An FHFA official said they expected the new loans to be a small part 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 in a statement.
U.S. Lowers One Hurdle to Obtaining a Mortgage
Hoping to lure more first-time home buyers into the housing market, the government on Monday detailed its plan to offer mortgages with a down payment of as little as 3 percent of the purchase price.
The proposal, first announced in October, aims to make mortgages more widely available to people who have a strong credit history but lack the ready cash for the standard 20 percent down payment.
Some critics warned about the risk of repeating the subprime mortgage fiasco and opening the door to higher defaults among home buyers lacking any substantive equity cushion in case of another downturn in the market. But federal housing officials and other experts challenged these concerns, saying the new programs include a range of safeguards, including underwriting restrictions, a requirement to buy private mortgage insurance and counseling to reduce the risk of defaults.
“These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices,” Melvin L. Watt, the director of the Federal Housing Finance Agency, said in a statement.
Melvin Watt, head of the Federal Housing Finance Agency, said on Monday that he wanted to lure more first-time home buyers. Credit Isaac Brekken for The New York Times
Mr. Watt’s agency regulates Fannie Mae and Freddie Mac, the two large government-backed entities that guarantee mortgages and will be offering the new mortgage programs. While both Fannie and Freddie will require the loans to be fixed rate and to cover the borrower’s primary residence, some features differ.
Fannie Mae’s new My Community Mortgage program begins this week and is open only to first-time buyers with a minimum credit score of 620. Borrowers with Fannie-backed mortgages will be eligible to refinance with a limited amount of money that can be taken out.
Freddie Mac’s new Home Possible Advantage mortgages, which begin in March, will be available to both first-time and other qualified borrowers. In most cases, credit scores will be just one of several factors in determining a home buyer’s eligibility, a spokesman said. Refinancing, though with no cash-out, also will be available.
The programs are the latest efforts to promote homeownership after the collapse of the housing bubble, in hopes of reviving a housing industry that is still plagued by excessive foreclosures and struggling to overcome millions of owners still trapped in underwater mortgages.
Today, first-time home buyers — who are generally younger — account for just 29 percent of home sales, far below the historical rate of 40 percent, according to the National Association of Realtors. In the third quarter of this year, the Census Bureau reported recently, the nation’s seasonally adjusted homeownership rate was 64.3 percent, the lowest level in two decades.
The government’s move was applauded by the mortgage insurance industry, which expects a business increase from the new programs, and advocates for low-income families.
“We wouldn’t be putting borrowers in these loans if we were worried about their performance through stressful times,” said Rohit Gupta, chief executive of Genworth’s United States Mortgage Insurance Business and co-chairman of the U.S. Mortgage Insurers, a trade association.
The Urban Institute, a nonprofit research organization that generally supports social programs, concluded: “Those who have criticized low-down-payment lending as excessively risky should know that if the past is a guide, only a narrow group of borrowers will receive these loans, and the overall impact on default rates is likely to be negligible.”
Housing officials declined to estimate just how many people might take advantage of these new loans, but even supporters question the magnitude of the new programs.
Guy D. Cecala, chief executive and publisher of the newsletter Inside Mortgage Finance, estimated the effect would be modest, noting that first-time buyers who qualified for similar low down payment loans accounted for only 3 percent of Fannie-backed mortgages in 2013.
“It’s another tool in helping the housing market, but not a huge one,” Mr. Cecala said.
Since the borrowers must still be credit worthy, he explained, “this is not pushing the envelope.”
Diane Swonk, chief economist at Mesirow Financial in Chicago, also expressed doubt that this latest initiative would lure many new buyers, saying that the lack of demand and tight mortgage standards have been bigger hurdles than the size of the down payment.
Mark A. Calabria, an economist at the libertarian Cato Institute, was not as sanguine about the financial stability of the targeted borrowers. Given closing costs, he said, “You’re essentially underwater when you walk away from the table.”
“That is not a situation we should be trying to get people in,” he said.
To Andres Carbacho-Burgos, a senior economist at Moody’s Analytics, however, the danger of mortgage defaults generally comes from lax monitoring, not lower down payment requirements.
While sharing the view that the effect would be limited, Mr. Carbacho-Burgos said the program was nonetheless worth pursuing. “Anything that can be done to restart the first-time home buyer market is a good thing,” he said.
A version of this article appears in print on December 9, 2014, on page B1 of the New York edition with the headline: U.S. Lowers One Hurdle to Obtaining a Mortgage