First-time home buyers and move-up buyers may find it somewhat more difficult to obtain a mortgage under rule changes announced Wednesday by a major government-sponsored purchaser of loans.
The Federal Home Loan Mortgage Corp., known as Freddie Mac, said it would phase out its purchases of low-documentation mortgages and of adjustable-rate mortgages (ARMs) with less than a 10% down payment.
Purchases of those types of loans, both considered somewhat riskier than standard mortgages, will be eliminated entirely after March 31.
However, industry experts said the moves would only have a slight impact on Californians since these types of loans are not particularly popular here.
“There are going to be some brokers who are upset about this,” said Bob Griffin, president of the California Mortgage Bankers Assn. “But it will not affect the ability of legitimate home buyers to get a loan.”
In a low-documentation or no-documentation loan, the lender, to speed the loan approval, waives some of the usual proof demanded of the borrower’s financial condition, sometimes including income and employment verification.
Typically, so-called no-doc or low-doc mortgages are used by people who have substantial equity in a home they are selling and want fast approval on a mortgage for a new home.
ARMs with low down payments are most popular with renters who barely have enough money to buy a home.
The Federal National Mortgage Assn., or Fannie Mae, which announced two months ago that it was tightening its low-documentation loan program, lauded Freddie Mac’s decision as “a prudent and positive step.”
Both will continue to purchase alternative-documentation mortgages in which a borrower’s financial standing is verified with more easily obtainable documents such as paycheck stubs.
Freddie Mac estimates that about 25% of the loans it is purchasing this year will be low-documentation mortgages. It said 9% of the ARMs in its portfolio are low down payment mortgages.
James Nelson, president of the Mortgage Bankers Assn. of America, said the changes will lengthen the loan-processing time for some move-up buyers and pinch some first-time home buyers. But, he said, they were desirable because of the deterioration of the economy nationally and of home prices in some areas.
“It’s a sound move, given the times we are in,” he said.
Fannie Mae and Freddie Mac are congressionally chartered, stockholder-owned companies. They finance about one quarter of the nation’s single-family home sales by buying loans from banks and other lenders. They retain some and repackage others into securities for resale to investors.
During the past year, both companies have come under pressure from the Treasury Department to tighten their procedures. Although both have only limited government backing, most investors assume they would be bailed out by the government if they got into trouble.
Fannie Mae continues to buy low down payment ARMs. It said it has not had a default problem with the loans because it purchases only from established lenders with a proven track record.
Fannie Mae Senior Vice President Robert Engelstad refused to disclose how many such loans the agency buys or the default rate.