As home lenders fret about a forthcoming regulatory proposal on risk retention, Freddie Mac will soon require a little more skin in the game from their borrowers.
The government-sponsored enterprise said Tuesday that beginning June 1 most borrowers will need at least 5% equity in the home for their loans to be eligible for sale to Freddie.
Freddie currently accepts loans with as little as 3% down. Although such purchases "have been minimal in recent years," the GSE said in a memo to lenders, "the performance of these mortgages has been unacceptable." (Last year, mortgages with down payments of 10% or less made up just 3% of Freddie's purchases, down from a peak of 11% of its purchases in 2007, said Brad German, a Freddie spokesman.)
The lone exception to the new guidelines, Freddie said, will be loans refinanced through the government's Home Affordable Refinance Program, which is designed for borrowers who owe more than their properties are worth.
Fannie Mae still accepts mortgages with loan-to-value ratios up to 97%, according to guidelines on the GSE's website. (By law, neither Fannie nor Freddie can touch a mortgage with equity of less than 20% unless it has private mortgage insurance. Both GSEs are operating under the conservatorship of the Federal Housing Finance Agency.)
Under the Dodd-Frank Act, lenders will be required to retain 5% of the credit risk of a mortgage they securitize, a prospect many banks find unappealing. Regulators are writing rules that would exempt "qualifying residential mortgages" that meet stricter underwriting criteria from the risk-retention requirement. One of those criteria would be a down payment of at least 20%.