Even as Fannie Mae tightens standards on most new mortgages, the government-sponsored enterprise is offering buyers of its repossessed homes financing with some of the most generous terms available today.
Fannie's HomePath program lets borrowers put down as little as 3%, without paying for mortgage insurance, which is usually required for conforming loans where the borrower has less than 20% equity. HomePath also accepts borrowers with credit scores as low as 660 — 60 points below lenders' standard cutoff for loans headed to Fannie. Appraisals, a traditional prerequisite for getting a mortgage, are optional under HomePath.
The program underscores Fannie's motivation to clear its inventory of homes, which swelled 36% last year, to 86,155.
"Only time will tell if the risk is worth the reward, but Fannie is giving up little to eliminate a nonproducing asset," said John Dutra, a mortgage broker in Fremont, Calif. "Once closed, Fannie has a productive loan again," instead of an empty house that is not generating cash.
A stable of 28 lenders around the country originate HomePath loans, then sell them to Fannie.
Ron Bergum, the chief executive of Prospect Mortgage LLC in Sherman Oaks, Calif., the second-largest HomePath lender, said Fannie Mae is trying to stabilize housing prices with the program. "Fannie has provided the ability to get financing in a world where you can't get 97% financing," he said.
Though the GSEs by law generally cannot buy loans with less than 20% down that lack mortgage insurance, their charters give them flexibility when it comes to mitigating losses, such as those on seized collateral.
Fannie would not make executives available to discuss HomePath or to specify the volume of loans it has bought through the program, which was begun in February 2009.
Last year, Fannie disposed of 123,000 homes. If every one of those were financed with HomePath loans, at the same average carrying value as Fannie's remaining properties (about $98,000), the program's volume would have been about $12 billion last year. Fannie owns or guarantees $3.2 trillion of mortgages in all.
Through HomePath, Fannie is financing borrowers whose only other option would probably have been a Federal Housing Administration loan.
The FHA insures mortgages with down payments as low as 3.5%. Even with private mortgage insurance, Fannie and Freddie Mac will not buy loans with less than 5% down, and as a practical matter these days private insurers will not cover loans in distressed markets with less than 10% equity.
So in markets such as Phoenix, where more than 60% of the homes sold are foreclosed properties, the choice comes down to just two financing sources.
"It's HomePath versus FHA," said David Krushinsky, a mortgage banker at WJ Bradley Co. in Phoenix.
Ed Bisquera, a mortgage consultant at PC Home Loans in Vancouver, Wash., said HomePath "can be better than FHA, it just depends on what the borrower is trying to do."
One advantage of HomePath is the waiver of an appraisal requirement.
"If you're trying to get an FHA loan, FHA's appraisal process is much stricter, and they are going to require that repairs be made," said Brian Yampolsky, the owner of Orion Mortgage Corp. in Phoenix. "If it's a bank-owned house, who is going to pay for the repairs?"
Still, Yampolsky said he tells HomePath customers to do their own due diligence and order an appraisal. "The risk isn't as much on Fannie as it is on the buyer," he said.
Avoiding mortgage insurance premiums does not make HomePath a slam-dunk choice for borrowers, since lenders often charge additional fees for the loans. To avoid paying a higher rate, many borrowers will increase their down payment, a Fannie spokeswoman said. Fannie sweetened its incentives last month by agreeing to cover 3.5% of the closing costs of those who buy a HomePath property by May 1.
HomePath also is another way that Fannie and Freddie Mac still sometimes march to different drummers, even though both have operated under Federal Housing Finance Agency conservatorship since 2008. Freddie's HomeSteps unit is marketing the GSE's seized properties without offering any special financing. None is needed, Freddie says.
The combination of historically low interest rates, available financing and the homebuyer tax credit "provide serious buyers with a terrific opportunity to purchase our homes," said Chris Bowden, the vice president of HomeSteps.
The top two home lenders, Bank of America Corp. and Wells Fargo & Co., are conspicuously absent from Fannie's list of HomePath lenders. National Mortgage News has reported that Wells and B of A together originated 63% of all home loans written in the third quarter.
The two lenders said they are evaluating whether to take part in HomePath. But they have their own large inventories of seized homes, making them potential competitors for the same buyers.
"To take on more high-risk loans would only cause more problems for the big banks," said David Lykken, president of the consulting firm Mortgage Banking Solutions.