Some good news finally came out of Las Vegas today, and I’m not talking about someone winning a mega jackpot on an oversized one-armed bandit.
During the Mortgage Bankers Association’s Annual Convention in Sin City, it was revealed that Fannie Mae and Freddie Mac will again accept mortgages with as little as three percent down.
This is a reversal to an earlier policy change whereby the pair stopped buying loans with down payments of less than five percent.
In fact, about a year ago Fannie Mae reduced its max loan-to-value ratio (LTV) from 97% to 95%, forcing those with little in assets to consider the FHA.
Mel Watt Finally Comes Through
Earlier today, FHFA chairman Mel Watt told conference attendees in prepared remarks that the agency is working with Fannie and Freddie “to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent.”
This is after months of him doing absolutely nothing since taking the job, at least as far as the public could see.
While the specifics are unclear, he did say such lower-down payment mortgages would take into account “compensating factors,” which are generally things like a good credit score, solid job history, low DTI ratio, and so on.
So you’ll actually have to be a good borrower to get a conventional loan with just three percent down, unlike the FHA, which allows 3.5% down with really low credit scores.
The change comes at a time when “access to credit remains tight for many borrowers,” per Watt, though that issue is certainly debatable.
However, it is intended to allow lenders to “more aggressively make responsible loans available to creditworthy borrowers.”
Less Liability for Mortgage Lenders
He also told the crowd that the FHFA was actively working to refine the Representation and Warranty Framework to ensure lenders know the loans they sell to Fannie and Freddie won’t face costly repurchase risk.
Because of the continued uncertainty regarding buybacks, banks and lenders have instituted overlays as a buffer above what the pair allows to avoid any unintended costs.
Unfortunately, it is consumers who pay for this in the way of higher mortgage rates, or worse, flat out denial.
This area of mortgage reform has been a work in progress with more and more refinements being released to provide better clarity. Watt hopes to make things very clear so lenders can offer seemingly higher-risk loan products with a lower level of liability.
While this will be welcome news for borrowers struggling to come up with the necessary funds to buy a home, there are lenders already offering conventional loans with 3% down.
For example, TD Bank offers LTVs up to 97% without private mortgage insurance. Some community banks and credit unions also offer similar low-down payment loans.
Of course, the interest rates are probably higher on such specialty offerings, and likely more restrictive than what Fannie and Freddie will soon allow.
So borrowers should be able to get low-down payment loans at a reasonable price once again, which should boost lending and overall homeownership.
The worry is whether we’re wading back into the deadly waters that created the housing crisis to begin with. But affordable housing goals call for such loosening, whether well intentioned or not.
Perhaps the move will force the FHA to lower mortgage insurance premiums, which are now sky-high and highly unattractive to just about everyone.