Freddie Mac on Wednesday unveiled its version of a program to enable low-income borrowers to buy a home without down payments from their own pockets.
Freddie Mac's Alt 97 program, announced at the Mortgage Bankers Association's National Secondary Market Conference, requires a 3% down payment that can come from a gift or unsecured loan. Fannie Mae, which introduced a similar program a week ago, said it has gotten 7,000 calls from lenders and consumers interested in participating.
As the conference got underway, both government-sponsored enterprises emphasized efforts to expand homeownership in underserved markets, including lower-credit-rated borrowers.
Fannie Mae's Flex 97 program and Freddie's Alt 97 address what has been identified as the No. 1 obstacle for low-income borrowers in obtaining a mortgage: coming up with a down payment.
A 3% down payment on a mortgage has been in the marketplace for some time, but the two companies, whose mission is to provide liquidity in the mortgage market by buying loans and packaging them for sale to investors, have relaxed their rules by allowing a borrower to use sources other than savings for the down payment. Fannie's Flexible 97 is a 30-year fixed-rate mortgage. Freddie Mac said its Alt 97 will be offered as 15-, 20-, or 30- year fixed-rate mortgages.
Neither agency has an income limitation or counseling requirement for the loans. And both will offer mortgages up to the conventional limit of $227,150 for Fannie and Freddie loans.
"The risk is obviously that the homeowner has no funds into the deal," said Jon E. Korpela, senior vice president, secondary market, for Banknorth Mortgage Company in West Brattleboro, Vt. But he said Fannie and Freddie's automated underwriting systems will help lenders mitigate risk.
The difference between Fannie Mae and Freddie Mac was more pronounced in their approaches to the subprime market.
Freddie Mac president David W. Glenn told the conference that Freddie Mac financing would be extended to borrowers with B and C ratings.
Jamie S. Gorelick, vice chairman of Fannie Mae, said her company is more "leery" of the lower-rated credits. She cited a recent Fannie Mae Foundation survey that showed "most blacks and Hispanics would prefer to take the time to qualify for a prime loan" rather than "sentence themselves to a long period of subprime borrowing" at higher cost.
Fannie's efforts will be focused on the A-minus segment, and on helping lower-rated consumers to reach that credit standing, Ms. Gorelick said.
Marc Smith, president and chief executive officer of the MBA, said the willingness on the part of the agencies to move further down the credit spectrum was welcome. When the agencies moved to credit scoring a few years ago, he said, they appeared to move from accepting A-credit-quality loans to accepting only A-plus credit.
He noted that the share of the market held by the Department of Housing and Urban Development's FHA program had increased slightly since then.
Mr. Smith said Fannie and Freddie's willingness to buy lower-credit quality loans is "a good initiative to be more competitive with FHA."
Some mortgage bankers said they would remain wary of B and C loans even if Freddie Mac is willing to buy them. These lenders book servicing income when they sell the loan. They said such loans tend either to go bad or to be refinanced as the consumer's credit rating improves, which could subject loan originators to losses.