Fannie Moves Aggressively on New Low-Downpayment Loans

Fannie Mae wasted no time Monday in implementing new offerings for low downpayment loans for first-time homebuyers, saying it would begin accepting applications immediately for borrowers with FICO credit scores as low as 620 as well as offering limited cash-out refinances.

In contrast, however, Freddie Mac took a more cautious approach, delaying the start of its low downpayment program until March 23, requiring borrowers to receive credit counseling first and in some cases using a higher minimum FICO score of 660.

The programs are part of a bigger push by the government to encourage lenders to loosen credit score requirements that have locked some potential homebuyers out of the housing market. Federal Housing Finance Agency Director Mel Watt has pushed for lenders to expand access to credit to first-time homebuyers who would otherwise qualify for a mortgage but may not have a large enough down payment. The programs would allow borrowers to qualify with as little as a 3% downpayment.

"These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices," Watt said in a statement.

Fannie's more aggressive tack is likely due to its greater experience with low downpayment programs, which it has offered for the past six years through state housing finance agencies.

Fannie declined to provide default data on the low downpayment loans it currently offers through housing finance agencies.

Andrew Wilson, a Fannie spokesman, said the government-sponsored enterprise is limited in what can be disclosed publicly "based on securities laws."

"We are comfortable with these loans based on the performance of loans we've acquired previously, our underwriting standards and our risk management practices," Wilson said in an email.

Other Fannie executives also downplayed any potential risk from the new program. Andrew Bon Salle, a Fannie executive vice president, said the 97% loan-to-value loan is "one way" that Fannie is trying to remove barriers for creditworthy borrowers who want to buy a home.

"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," he said. "This option alone will not solve all the challenges around access to credit."

It may be too early yet to parse how far-reaching the 3% downpayment loans will be. Some mortgage experts have criticized efforts to loosen credit, arguing it could lead to another housing downturn. Housing policy experts have claimed many eligible borrowers have been locked out of buying a home because they can't afford a larger downpayment.

The details could further limit borrowers' options.

Fannie's cash-out refinancing option, which Freddie is not offering, is limited to borrowers who already have a mortgage with the GSE. The borrower cannot take out any equity from the home, but the refinancing would allow the borrower to cover up to $2,000 in closing costs and take advantage of lower interest rates.

Both GSE programs require private mortgage insurance or other risk sharing, which is mandated for all purchase loans with loan-to-value ratios greater than 80%.

The FHFA did not provide an estimate of how many borrowers it expects will apply for the low downpayment loans. The agency will monitor the programs over time with a keen eye toward default rates.

The 97% LTV loans all also require full documentation and do not have the interest-only or negative amortization features that proved disastrous to many borrowers during the housing bust. The loans will meet Fannie and Freddie's eligibility requirements including underwriting, income documentation and risk management standards.

Whether lenders will be willing to be as aggressive as Fannie and Freddie, however, is still unclear. Mortgage lenders are concerned that looser credit will result in a more defaults and, hence, demands from Fannie and Freddie to buy back loans.

Lenders have claimed they were forced to require higher credit scores and lower debt-to-income ratios from homebuyers — far above the GSEs' minimum guidelines — to protect themselves from expensive buybacks.

Dave Lowman, an executive vice president at Freddie Mac, said it was too early to tell if lenders would use the program, which he called "a significant milestone in returning the housing market to normalcy."

"We have substantial experience with these loans and can confidently and prudently manage these risks," Lowman said on a conference call with reporters.

The new programs have a few pertinent caveats that could also limit its reach. For example, Fannie has a separate program just for low-income borrowers. While its main low downpayment program does not require housing counseling, those that are part of its low-income program, called My Community Mortgage, face such requirements.

Both Fannie and Freddie programs also have income requirements. Freddie, for example, requires the borrower's annual income must not exceed 100% of the area's median income. But there is no income limit in certain underserved areas.

To mitigate risk, Fannie and Freddie will use their automated underwriting systems, which include compensating factors to evaluate a borrower's creditworthiness. Fannie's Desktop Underwriter and Freddie's Loan Prospector underwriting engines allow debt-to-income ratios higher than 43%.

Freddie will require a minimum credit score of 660 for loans that are manually underwritten, and a 680 score for refinances.