On Monday December 8th, 2014, Fannie Mae and Freddie Mac officially detailed their plans to change the mortgage industry. Their highly controversial plan to lower the down-payment requirement to 3% is intentioned to make homeownership more accessible to those borrowers with little cash on hand but good credit, good borrowing history, and while it sounds risky, Fannie Mae and Freddie Mac assure that the plans include safeguards as protection against instances that have led the financial crisis of 2008. The program is designed to reach out to low-moderate income families who have the ability repay, but not enough to put down for the down payment. All participants in the program will have to obtain private mortgage insurance. The plan includes provisions to prevent the predatory lending that was so prevalent prior to the housing market crash.
The 3% down-payment loans will only be allowed for mortgages with a fixed-rate on a single family home, and it must be a primary residence. The borrower must be able to prove ability to repay with full documentation. This program is available to borrowers who have not owned a primary residence for at least 3 years. Andrew Bon Salle, executive vice president for single family underwriting, pricing, and capital markets at Fannie Mae stated, “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” (The Los Angeles Times, 2014). Borrowers with Fannie Mae mortgages will also be able to refinance and will have the ability to take out $2000 to cover closing costs, but will not be allowed to remove any equity from the home.
Freddie Mac is offering a similar program open to any eligible borrower, but first-time borrowers using the program must participate in a home ownership education and counseling program. Counseling and education programs will not be required under the Fannie Mae program. The Freddie Mac program is called the Home Possible Advantage, and aims to achieve the same goal as the Fannie Mae program: to allow qualified borrowers with limited savings for a down payment to gain entry to the market and be able to become homeowners.
The Los Angeles Times contends that these programs stand to benefit homebuyers in expensive areas such as Southern California, “where accumulating a down payment is among the many barriers to owning a house, especially for lower-income families”. A large criticism of the program is, “not just because the risk of default is higher but because [low-down payment loans] were among the loosening of lending standards that drove home prices to unsustainably high levels during the housing boom. ‘The idea that you can get a mortgage with just 3% down is something that can get us back into bubble territory,’ Russell Goldsmith, chairman of City National Corp. in Los Angeles” (The Los Angeles Times, 2014). Others state they are “extremely concerned about taxpayers backing high-risk mortgages with ultra-low down-payments” (The Los Angeles Times, 2014). Another critic states, “such loans are inherently risky because the borrower has almost no financial cushion against a personal or economic downturn, vastly increasing the likelihood they will walk away from the loan once it gets significantly underwater…the programs would be an invitation by government for industry to return the slipshod and dangerous practices that caused the mortgage meltdown in the first place and wrecked our economy” (The Los Angeles Times, 2014). Fannie Mae and Freddie Mac have required at least 5% down on their loans since 2011. The Federal Housing Administration insures mortgages with down payments as low as 3.5%, but with high mortgage insurance their overall costs can soar higher than Fannie or Freddie loans.