Recently, housing finance giants Freddie Mac and Fannie Mae announced plans to back mortgages with down payments as low as 3 percent.
They say this latest move to open up more access to home-ownership will have measures in place to protect against abuses which led to the subprime housing market crash.
The government sponsored enterprises will only back fixed-rate mortgages on single-family homes which will be the borrower’s primary residence. Full documentation on the ability to repay the mortgage will be required. “Our goal is to help additional qualified borrowers gain access to mortgages,” said Andrew Bon Salle, Executive Vice President at Fannie Mae. He said, “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.”
According to Freddie and Fannie officials, the program was designed to help borrowers with low or moderate incomes, who are credit-worthy and can demonstrate the ability to repay a mortgage, but lack the money needed to make a 5 percent down-payment.
The programs will be different. Freddie Mac’s program, called Home Possible Advantage, will be limited to mortgages for first-time homebuyers. Borrowers will have to purchase private mortgage insurance and must participate in a homebuyer counseling and education program before getting the loan. Refinancing is available under the program, but the borrower wouldn’t be able to take any cash out of the refinance. The Fannie Mae program will be available to anyone who has not owned a primary residence for three years and while private mortgage insurance will be required, housing counseling and education will not.
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Some lenders are hesitant to support low down-payment loans because they were part of the relaxing of lending standards which helped to drive home prices to unsustainable levels; in addition to the higher default risk. “The idea that you can get a mortgage with just 3 percent down is something that can get us back into bubble territory,” Russell Goldsmith, chairman of City National Corp. in Los Angeles.
