April 20, 2018

FHFA Defends Lower Down Payments

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FHFA Defends Lower Down Payments

New programs that back mortgages with down payments as low as 3 percent are “just as safe” as a loan with a 10 percent down payment, Melvin Watt, director of the Federal Housing Finance Agency, assured lawmakers Tuesday.

A Boost for Homeownership?

3% Down Payments May Be Game Changer

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Smaller Down Payments Lure More Buyers

When FHFA, the regulator of Fannie Mae and Freddie Mac, announced at the end of last year that first-time buyers would be able to qualify for loans with down payments as low as 3 percent, some expressed fears that the move could stir a wave of future defaults. The change was intended to expand credit for qualified home shoppers who had been sidelined from the housing market the last few years due to high down-payment requirements. Some lawmakers worry that smaller down payments may lead to the return to irresponsible lending practices blamed for the last housing crisis. Others express concern that smaller down payments will allow buyers to purchase homes they really can’t truly afford.

"When the down payment is lower, there’s the potential it can be a riskier loan," Watt told lawmakers. "But when you pair that with other compensating factors… you offset that additional risk. That’s exactly what we’ve done."

To qualify for the smaller down payment loans, Fannie and Freddie require full documentation, strong credit scores, housing counseling, and private mortgage insurance, Watt said. Also, the loans will comprise only “a very small percentage” of the mortgages in Fannie Mae and Freddie Mac’s portfolios.

Fannie began backing the loans with the smaller down payments in December; Freddie will begin in March.

"If somebody can’t pay a loan, they shouldn’t be given a loan," Watt told lawmakers. "It would be irresponsible to say we should be making those loans or that Fannie and Freddie should be backing those loans." Watt argued that the smaller down payments will allow those who have not been able to save enough for a large down payment to break into home ownership sooner.

The National Association of REALTORS® has voiced its support of the smaller down payments backed by Fannie Mae and Freddie Mac.

“REALTORS® support responsible lending to qualified buyers, which is essential for building strong communities,” NAR President Chris Polychron said in a statement released Tuesday. “NAR research shows that saving for a down payment is the biggest hurdle to home ownership for many first-time buyers, who have been entering the market at lower than normal rates. Improved access to safe, affordable mortgage credit through FHFA’s 3 percent down payment program will help new borrowers achieve the dream of home ownership.”

Housing and Urban Development officials also recently defended the Federal Housing Administration’s move to lower annual premiums on its insurance, which could save a typical first-time home buyer about $900 a year. FHA, which insures home loans with down payments as low as 3.5 percent, dropped its annual premiums this week from 1.35 percent to 0.85 percent. Some lawmakers and critics have voiced concern that the lower premium could lead to another FHA bailout from taxpayers. FHA last year had regained its financial footing, after requiring a $1.7 billion taxpayer bailout in 2013. But officials with HUD, FHA’s regulator, said that the lower premiums will not come at the cost of taxpayers and also will help FHA increase its market share. 

Source: “Fannie Mae, Freddie Mac Regulator Defends 3% Down Payment Mortgages,” The Los Angeles Times (Jan. 27, 2015) and “FHA: Lower Premiums Will Not Cost Taxpayers,” REALTOR® Magazine Daily News (Jan. 27, 2015)