The Bryan Ellis Investing Letter – Artificially-low down payments and overly-easy mortgage qualifying worked so well just a few years ago that the feds are gearing up to do it again. Fannie Mae and Freddie Mac officially announced this week that they will begin allowing first-time borrowers to purchase homes with a three-percent down payment in hopes of “increasing homeownership and particularly household formation by offering loans to those who can afford mortgages but lack resources to make a 20-percent down payment plus closing costs.”
In response, lenders warned that lowering down payments so substantially would increase the risk associated with the loans, but Mel Watt, Federal Housing Finance Agency (FHFA) director, countered with his opinion, saying, “These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.”
He assured lenders that the GSEs would use their automated underwriting systems to make sure that borrowers are creditworthy. Borrowers also will have to complete a homeownership counseling course and their loans’ performances will be closely monitored.
Prior to the new policy, the standard down payment for mortgages insured through Fannie and Freddie had been 20 percent, although the FHFA has sponsored some programs that helped first-time buyers get loans with down payments as low as five percent. According to the National Association of Realtors (NAR), far fewer first-time homebuyers were entering the market under the 20-percent rule – down to 29 percent in October of this year from a historic average of 40 percent of home purchases.
Fannie Mae will likely begin underwriting the new three-percent-down loans by the end of the year, and most companies have said that they will only write 30-year, fixed-rate mortgages for the low-down-payment loans. Monthly payments will be permitted to be as high as 43 percent of a borrower’s income despite conventional wisdom that dictates that housing should not take up more than a third of annual income. Borrowers will be required to earn less than an area’s median income in order to qualify for the low down payment and they will have to pay mortgage insurance as well.
Do you think that this is a good policy decision? Are we gearing up for a federally-sanctioned, taxpayer-funded second round of the housing crash?