Fannie Mae and Freddie Mac on Monday spelled out the terms under which they will accept mortgages with down payments of as low as 3 percent from first-time buyers, but it may take time to see how many lenders will sign on.
The change in policy, broadly announced in October, is designed to entice millennials and low- and moderate-income consumers to become home owners, a move many aren’t making, either by choice or because of limited finances. The absence of young, first-time buyers from the market has weighed heavily on the industry’s comeback from the housing crisis.
As of September, the nation’s home-ownership rate had sunk to a 19-year low of 64.4 percent.
The policy shift also will open another avenue to home ownership for consumers who may have considered a Federal Housing Administration-backed loan but were dissuaded by the higher upfront fees and monthly insurance premiums now attached to such mortgages. Borrowers with higher credit scores will find the Fannie and Freddie loans cheaper, officials said in a briefing.
In an attempt to deflect criticism of the programs as a return to the loose lending standards that led to the foreclosure crisis, officials from Fannie and Freddie say there are safeguards built in to ensure that participants are able to repay the debt.
Agency officials said they expect a broad range of lenders to offer the fixed-rate mortgage programs.
But Bank of America already has said it will continue to require higher down payments.
There are differences in the two agencies’ requirements for borrowers.
For example, Freddie Mac will require home-ownership counseling. Its program also will provide for no-cash-out mortgage refinancing.
Fannie Mae’s refinancing option will have a limited cash-out component to cover closing costs, requires counseling only for low- to moderate-income consumers and will allow monetary gifts to be considered as financial reserves.
Industry leaders and legislators have been talking about the potential effect of the shift since October, when Melvin Watt, director of the Federal Housing Finance Agency, announced that the two agencies were working on policies to make it easier for creditworthy but cash-strapped consumers to enter the housing market.
Criticism of the plan started shortly afterward.
Last month, Robert Toll, Chief Executive of home builder Toll Bros., called the idea “dumb,” and Texas Republican Jeb Hensarling, Chairman of the House Financial Services Committee, said it would return the housing market to the “slipshod” practices that “wrecked our economy.”
Fannie Mae and Freddie Mac don’t originate mortgages themselves. Lenders sell loans that meet specific criteria to the two agencies, which then package them into securities and sell them to investors. Because the investments are guaranteed, an investor is still made whole if a home owner defaults on a mortgage, and the agencies can force a lender that originated a mortgage that went bad to buy it back.