Housing finance giants Fannie Mae and Freddie Mac on Monday detailed plans to once again back mortgages with down payments as low as 3%, saying the move to make home ownership more accessible contains safeguards to protect against abuses that led to the subprime housing market crash.
The loans would be allowed only for fixed-rate mortgages on single-family homes that would be the borrower's primary residence and would require full documentation of the ability to repay the mortgage, said officials from the two firms and their regulator, the Federal Housing Finance Agency.
"Our goal is to help additional qualified borrowers gain access to mortgages," said Andrew Bon Salle, executive vice president for single family underwriting, pricing and capital markets at Fannie Mae.
"We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers," he said.
Officials said the program was designed to help credit-worthy borrowers, particularly those with low or moderate incomes, who can demonstrate the ability to repay a mortgage but lack the money needed for at least a 5% down payment.
The two firms will offer somewhat different programs.
Freddie Mac's program, called Home Possible Advantage, is open to anyone who meets certain requirements, but first-time home buyers must participate in a home ownership education and counseling program. All participants will have to pay for private mortgage insurance.
FOR THE RECORD
5:49 p.m.: A previous version of this post stated that Freddie Mac would limit its program to first-time home buyers. The program is open to any eligible borrower, but first-time home buyers must participate in a home ownership education and counseling program.
Homeowners with Freddie Mac mortgages could also refinance under the program, but would not be able to take any cash out as part of the process.
"Home Possible Advantage gives qualified borrowers with limited down payment savings a responsible path to home ownership and lenders a new tool for reaching eligible working families ready to own a home of their own," said Dave Lowman, Freddie Mac's executive vice president of single-family business.
Fannie Mae's program will be available to anyone who has not owned a primary residence for three years. Private mortgage insurance will be required but counseling and education will not.
Borrowers with Fannie Mae mortgages will be able to refinance and can take out up to $2,000 to cover closing costs but will not be allowed to remove equity from their home.
The low-down payment option could benefit first-time homebuyers in high-cost areas like Southern California, where accumulating a down payment is among the many barriers to owning a house, especially for lower-income families.
But some lenders were skeptical about the value of low-down payment loans -- not just because the risk of default is higher but because they were among the loosening of lending standards that drove home prices to unsustainably high levels during the housing boom.
"The idea that you can get a mortgage with just 3% down is something that can get us back into bubble territory," Russell Goldsmith, chairman of City National Corp. in Los Angeles, said in a recent interview with The Times.
FHFA Director Melvin Watt announced the new low-down payment option in October, triggering sharp criticism from critics who said Fannie and Freddie were risking taxpayer money by loosening standards.
Since 2011, Freddie Mac has required at least a 5% down payment on loans it would back. Fannie Mae has required a 5% down payment since late last year for most mortgages, though still offered to back loans with a 3% down payment made through some state housing finance agencies.
FOR THE RECORD
11:54 a.m.: An earlier version of this post stated that Fannie Mae had required a 5% down payment since last year. The firm ended a broader program that backed loans with a 3% down payment but continued to back loans made through some state housing finance agencies.
The Federal Housing Administration, which has a more narrow impact in the housing market, insures mortgages with down payments as low as 3.5%.
FHFA said the 3% down payment loans would be a small portion of the portfolios of Fannie Mae and Freddie Mac but did not have an estimate of how many home buyers would take advantage of the programs.
Fannie Mae and Freddie Mac were seized by the government in 2008 as they teetered near bankruptcy because of bad mortgages they backed.
Taxpayers pumped $187.5 billion into the companies to keep them afloat. But as the housing market has rebounded, Fannie Mae and Freddie Mac have returned to profitability.
This year, the firms finished repaying all the bailout money through quarterly dividend payments to the government. They have continued making billions of dollars in dividend payments, helping reduce the overall government budget deficit.
Watt said the 3% down-payment programs come with strong underwriting standards that "provide a responsible approach to improving access to credit while ensuring safe and sound lending practices."
But his October announcement drew criticism from some
House Financial Services Committee Chairman Jeb Hensarling (R-Texas), said at the time he was "extremely concerned" about taxpayers backing "high-risk mortgages with ultra-low down payments."
"Such loans are inherently risky because the borrower has almost no financial cushion against a personal or economic downturn, vastly increasing the likelihood they will walk away from the loan once it gets significantly underwater," he said.
Hensarling added that the programs would be "an invitation by government for industry to return to slipshod and dangerous practices that caused the mortgage meltdown in the first place and wrecked our economy."