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Fannie and Freddie to Allow 3% Down Payments on Mortgages

by Peter Thomas Ricci

Fannie and Freddie are close to lowering their down payment requirements for borrowers.

Fannie Mae and Freddie Mac, the government-sponsored entities (GSE) that guarantee the majority of the nation’s prime mortgages, are nearing an agreement that would lower their down payment requirements from 5 percent to just 3 percent.

The news had been hinted last week, but Mel Watt, director of the FHFA (the federal agency that oversees the GSEs) confirmed the agreement in a speech at the Mortgage Bankers Association’s annual convention on Monday.

Fannie/Freddie to Accept Lower Down Payments

Details of the new down payment requirements will trickle out in the coming weeks, and Watt said in his speech that the lower requirements are intended to open credit access to a new set of consumers.

“Through these revised guidelines, we believe that the enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower down payment mortgages by taking into account compensating factors,” Watt said. “It is yet another much-needed piece to the broader access-to-credit puzzle.”

In Chicago Tribune article on the agreement, Dan Gjeldum, a senior vice president of mortgage lending at Guaranteed Rate (and 2014 Who’s Who participant) said that the move is an important one for consumers.

“It’s a very big deal,” Gjeldum said. “It will dramatically reduce the expense for a first-time homebuyer. The easier it is to do business with the agency, the easier it’s going to be for consumers to work with mortgage companies.”

Other Problems to Contend With

As the Tribune noted in its coverage, the down-payment reduction could very well be a response to the current anemia of housing’s recovery. Indeed, MBA CEO David Stevens noted in comments at the convention that 2014 purchase loan originations are set to fall more than 10 percent from 2013, and even Warren Buffett has expressed wonderment at why more people are not buying homes.

Still, although the lower down payment requirements will undoubtedly open the doors for many consumers – and will, notably, lack the overhead fees of a 3.5-percent down mortgage from the FHA – there are still a couple things we should bear in mind going forward:

•First, low down payments are great for consumers who lack the savings for a more formidable 10 or 20 percent down payment, but they come with a significant catch – even with low rates, the payments on a low-down-payment mortgage are much higher, and it takes the homeowner much longer to build equity (click here to see our recent story on a new kind of home mortgage that addresses those problems).

•Second, adding on to that point, lower down payments will not erase the more structural issues facing housing right now, namely: weak wage growth for most Americans (new research puts the bottom 90 percent of Americans at earnings reminiscent of 1986); and numerous  market trends that continue to render housing inaccessible for the middle class.

We do not mean to contend, of course, that lower down payments will not help housing – we’ll be watching the MBA’s weekly survey results closely once the new standards go into affect – but it’s also important that we keep in mind the bigger-picture trends that continue to affect housing as it marches forward towards recovery.

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