Shaking up Fannie and Freddie

Changes to Fannie Mae and Freddie Mac are designed to alleviate some of the problems that people have experienced in trying to get mortgages. Both lenders are now authorized to offer loans with down payments of just 3 percent. The programs, however, are not identical. The low down payment mortgages from Fannie will be available only to people who are defined by the Federal Housing Finance Agency as first-time homebuyers, meaning they have not owned a home in the last three years.

Freddie’s program offers low down-payment options to repeat buyers with low or moderate incomes. Freddie Mac also offers no-cash-out mortgage refinancing and requires all first-time borrowers to go through homeownership counseling. Fannie Mae’s guidelines requires counseling for low and moderate-income buyers and allows borrowers to count cash gifts as financial reserves. Fannie also offers a limited cash-out option to cover closing costs.

Fannie and Freddie’s clarification of lending guidelines last fall, coupled with the new low down-payment threshold, may help ease the mortgage bottleneck by letting in consumers who had been shut out by larger down payment requirements, prohibitively strict credit score limits and the Sisyphean task of completing all of the necessary paperwork on time.

Lowering Thresholds

In November, most mortgages issued by Fannie Mae and Freddie Mac were going to borrowers who had average credit scores of at least 754 out of 850, according to the Ellie Mae Origination Insight Report. Borrowers who took mortgages from the Federal Housing Administration also had high scores, attaining at least a 683 threshold. Those who succeeded in refinancing their mortgages had FICO scores of at least 739. Conventional loans for purchasing homes were denied with a score of 732 and 699 for homeowners seeking to refinance.

New guidelines that took effect in early December clarify the credit approval threshold for Fannie and Freddie at 620, erasing some of the uncertainty on the part of lenders, who may have been reluctant to approve loans to people with subprime scores.

“People are still going to have to qualify,” said Key Mortgage President Steve DiMarco. “Fannie Mae is talking about a 3 percent down product, and they’re very sensitive to the housing market, or at least to giving a particular constituency access to the housing market. That’s good for everybody; the more robust, the more players that can participate. I think in 2015, we’re going to see the launch of a 3 percent down Fannie Mae product, and then I think the FHA is going to have to either adjust their mortgage premium and get that sized right, or they’re going to die. They’re going to lose their relevancy, because consumers are not choosing that FHA option because of cost.”