97% LTV? Can It Be?

imgresThe rumors are true.  Mortgage giants, Fannie Mae and Freddie Mac both recently announced their plans to once again purchase loans at 97% loan-to-value (LTV) when it comes to first-time homebuyers.  This has been a highly debated topic in the past, as some believe borrowers that put only 3% down on a mortgage are more risky as the small down payment may be indicative of the borrower’s tendency to save money.  The counter argument suggests that this is the effort needed to encourage home purchases for first-time homebuyers.  The Huffington Post reports, “For the record, there is a simple and straightforward logic to the rationale supporting the reintroduction of 97 percent LTV mortgages at Fannie Mae and Freddie Mac.  Statistics show that 97 percent LTV mortgages work, and work well” (2015).

Numerous studies have shown that at this point in the United States housing market, the down payment stands as the most difficult obstacle for borrowers to overcome.  The hurdle has not done the housing market any favors in its vulnerable recovery state.  The growth in housing prices has been pricing many would-be buyers out of the market, which may be a huge contributing factor the down down-payment being seemingly impossible to overcome.  Without the allowance of lower down payments on certain mortgages (with certain limitations) the housing market might not continue on its upward trajectory.  “The tendency of the first-time homebuyer share to decline as house price growth increases is evident in the aggregate correlation nationwide, as well as in the correlations across most state and in most years between 1996 and 2013.  This provides evidence for the second hypothesis that increasing house prices may price some would-be first time homebuyers out of the market” (The Huffington Post, 2015).  Millennials, who should be buying at this point in time, have put it on hold due to lower income, high student loan debt, and high cost of living in terms of renting.  These factors have made it increasingly more difficult for millennials to save the way past generations have when in the same age group.

Statistics on the 97% LTV have demonstrated that the ability to repay on these mortgages is there.  “The Urban Institute tells us that the 1999-2012 default rate for 90 to 95 percent LTV mortgages was 6.9 percent, or roughly seven in 100, while the default rate for 95 to 97 percent mortgages (between 3 and 5 percent down payment) during the same period was 7.1 percent, or roughly seven in 100 – just about the same.  Additionally, as of January 2014, the Qualified Mortgage Rule with its Ability to Repay mandate has become the law of the land.  This presumably means that any and every qualified loan purchased by Fannie Mae and Freddie Mac will have met basic criteria demonstrating an ability to repay on the part of the borrower – including those mortgages granted at 97 percent LTV” (The Huffington Post, 2015).

The object of the 97% LTV is to make homeownership more accessible to well qualified borrowers who currently feel as though it is an unattainable goal.  Not only does this program need to be possible, but it needs to be pushed in order to meet its objective.

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