In an effort to entice more first-time home buyers into the market, as well as to help lenders make more loans to ‘underserved’ borrowers, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac are now accepting conventional mortgages with a down payment of as little as 3%.
However, that doesn't mean the two companies are reverting back to the lending practices of the past: Both companies are quick to point out that these loans will be underwritten using a much stricter set of criteria compared to the low-down-payment, no-down-payment loans of the mid-2000s.
Freddie Mac says its new Home Possible Advantage program – which offers qualified low- and moderate-income borrowers conventional 15-, 20- and 30-year fixed-rate mortgages with a maximum loan-to-value (LTV) ratio of 97% – is ‘designed to make responsible homeownership accessible to more first-time buyers and other qualified borrowers with limited down payment savings.’
‘Home Possible Advantage 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,’ says Dave Lowman, executive vice president, single-family business, at Freddie Mac, in a statement.
Home Possible Advantage mortgages can be used to buy a single unit property or for a ‘no cash out’ refinance of an existing mortgage, Freddie explains. First-time home buyers participating in the program must complete a borrower education program, such as Freddie Mac's CreditSmart, in order to qualify.
Fannie Mae's program, called ‘My Community Mortgage,’ is basically the same – however, the two companies use a different definition of ‘first-time home buyer.’ Under Fannie's definition, a first-time home buyer is someone who has not owned a primary residence in the past three years – whereas Freddie defines it as someone who has never owned a home before.
In addition, the two GSEs will be launching their respective programs on different dates: Fannie will be launching its ‘My Community Mortgage’ program on Dec. 13, whereas Freddie will be launching its Home Possible Advantage program in March.
Fannie previously offered a program allowing for LTV of up to 97%, but it was scrapped a couple of years ago.
The loans will require private mortgage insurance or other risk sharing, as is required on all purchase loans acquired by the GSEs.
‘Our goal is to help additional qualified borrowers gain access to mortgages,’ says Andrew Bon Salle, executive vice president for single family underwriting, pricing and capital markets, for Fannie Mae, in a release. ‘This option alone will not solve all the challenges around access to credit. Our new 97 percent LTV offering is simply one way we are working to remove barriers for creditworthy borrowers to get a mortgage. 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.’
Fannie Mae says it has ‘implemented prudent risk management practices’ to ensure that loans the company acquires are ‘appropriately underwritten.’
In a statement, Mel Watt, director of the Federal Housing Finance Agency (FHFA), conservator of the GSEs, says the new lending guidelines ‘will enable creditworthy borrowers who can afford a mortgage, but lack the resources to pay a substantial down payment plus closing costs, to get a mortgage with 3 percent down. These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.
‘To mitigate risk, Fannie Mae and Freddie Mac will use their automated underwriting systems, which include compensating factors to evaluate a borrower's creditworthiness,’ Watt adds. ‘In addition, the new offerings will also include homeownership counseling, which improves borrower performance. [The] FHFA will monitor the ongoing performance of these loans.’
The plan to have the GSEs allow up to 97% LTV on certain loans was first unveiled in October during the Mortgage Bankers Association's annual convention and expo. During that event, Watt announced that the FHFA was working with the GSEs ‘to develop sensible and responsible guidelines for mortgages with LTV ratios between 95 and 97 percent,’ meaning, in other words, loans with a 3% to 5% down payment.
‘Through these revised guidelines, we believe that the enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower down payment mortgages by taking into account compensating factors,’ Watt said.
The GSEs also recently announced significant changes to their representation and warranty frameworks that will help bring greater clarity as to when lenders will be subjected to loan buybacks. By clarifying and easing the rules around loan buybacks, the FHFA and the GSEs hope to entice lenders to loosen up their self-imposed internal overlays and make more loans to lower-income borrowers.