Fannie Mae and Freddie Mac will begin buying home loans with down payments as low as 3 percent, the bailed-out mortgage businesses announced Monday.
The plan for the two government-sponsored enterprises to back home loans with extremely low equity is part of the broader effort by their regulator to ease access to credit for more people.
“The new lending guidelines released today by Fannie Mae and Freddie Mac 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,” said Mel Watt, the director of the Federal Housing Finance Agency, which oversees the two businesses. “These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices,” said Watt, adding that his agency would monitor the loans.
A Fannie Mae executive said the company would require private mortgage insurance on the loans, so that private investors rather than taxpayers would incur the first losses on loans that went bad.
Fannie Executive Vice President Andrew Bon Salle said the 3 percent option was “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.”
Freddie Mac said in a statement that borrowers would have to undergo counseling to receive backing for mortgages with only 3 percent down. Fannie and Freddie boost liquidity in the mortgage market by buying loans from lenders, packaging them into securities, and selling them to investors with a government guarantee.
After banks and other lenders tightened credit in the wake of the subprime mortgage crisis, the FHFA this year under Mel Watt has sought to broaden access to home loans.
Watt and the government-sponsored enterprises have taken modest steps to ease credit, including by clarifying the terms under which lenders might face penalties or litigation for selling Fannie and Freddie bad loans and postponing increases in the fees the government-sponsored enterprises charge investors for the government guarantees of mortgage-backed securities.
But some lawmakers are skeptical of Watt’s intended course for the companies, worried that it represents the beginning of a return to the standards that were in place leading into the housing crisis. When Watt laid out his plans for Fannie and Freddie to back 3 percent-down mortgages in November, House Financial Services Committee Chairman Jeb Hensarling warned that it could lead the industry back into “slipshod and dangerous practices.”
