With low-down-payment home loans becoming increasingly common, the mortgage industry is grappling with how to manage the heightened risk.

On Wednesday, the largest investor in home mortgages, Fannie Mae. announced that it would follow its chief rival, Freddie Mac. and require more mortgage insurance on loans with down payments of less than 15%.

At the same time, however, the agency lowered its down payment requirements. Over the next year, it plans to buy up to $5 billion of 3%-down loans for people with low incomes. Most mortgage programs require at least 5% down.

"The overall purpose is to do more and more to meet the needs of homebuyers" making low down payments, said Franklin Raines, Fannie Mae's vice chairman.

Lenders across the country have been writing loans with increasingly low down payments this year as rising interest rates have intensified competition. Also fueling the trend: regulatory pressure on lenders to serve more low-income people.

Some 26% of all new mortgages in September had down payments of 10% or less -- up from 20% of the market at the start of the year, according to government data.

Even as more lenders jump in with new low-down-payment loan programs, some experts say that there is a limit to how far this business can grow, particularly as home price appreciation slows down.

"Clearly this [lending] entails a lot more risk," said Norwest Bancorp economist Sung Won Sohn. For the lending to continue, he said, fees, interest rates, and mortgage insurance must go up.

Low-down-payment loans to lower-income borrowers are riskier than lenders acknowledge, said former Fed governor Philip Jackson, now a professor at Birmingham Southern College.

The risks are "not so. high as to prohibit" the business, Mr. Jackson said, but lenders must have the "courage" to set aside larger reserves to cover the losses incurred, as well as charge higher rates that better reflect risk.

In hiking its mortgage insurance requirements, Fannie Mae -- formally the Federal National Mortgage Association -- matched a move made in September by Freddie Mac, formally the Federal Home Loan Mortgage Corp.

Under the new requirements for most types of loans, borrowers must get 30% insurance if they put less than 10% down, and 25% insurance if they put less than 15% down.

The loan requirements set by the agencies are widely followed by lenders across the country. Roughly half of all new mortgages are sold to the two competitors.

Earlier this year, Fannie Mae initiated a small program to buy 3%-down loans. But the effort announced Wednesday marks the first time that such loans will be broadly available.

Freddie Mac has said it considers 3%-down loans too risky, and a spokesman confirmed the agency has not changed its position.

Still, Freddie Mac issued a statement saying it was studying the "competitive implications" of Fannie Mae's announcement.

Mr. Raines said Fannie Mae believes the rise in low-down-payment lending is cyclical, and is related to the dominance this year of mortgages for home purchase rather than refinances. Asked if Fannie plans further insurance or fee hikes to deal with the trend, Mr. Raines said the agency has "taken the action that we think is appropriate given the market we understand now." "If the market were to permanently change in some dramatic way, we would have to revisit the situation," Mr. Raines said. In 1989, only 4.6% of Fannie's mortgages had down payments of less than 10%, the agency has said.

By 1993, that number was 6.9%. In June this year, 19.4% of Fannie's loans had less than 10% down, and in August almost 26% Freddie Mac has not released corresponding data, but said the average loan-to-value ratio for its mortgages rose to 78% at the end of the third quarter, from 71% a year ago.

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