Wednesday, November 5, 2014

Lower Mortgage Down Payments from Fannie Mae and Freddie Mac

The housing market is recovering, and fewer Chicago residents are worrying about home foreclosure.  But has the economy bounced back enough to make consumers comfortable buying a home?  According to a recent article in the Chicago Tribune, Fannie Mae and Freddie Mac may soon permit consumers to obtain a mortgage “with as little as a 3 percent down payment.”
Reasons for the New Down Payment Terms
If Fannie and Freddie begin allowing 3 percent down payments from consumers who want to buy a home, it won’t be the first time.  Indeed, in 2011, both agencies had accepted down payments as low as 3 percent.  Fannie Mae stopped last year (requiring at least a 5 percent down payment), while Freddie Mac had stopped back in June of 2011.
Why return to 3 percent down payments?  In short, many consumers in Oak Park and across the country are creditworthy, but they don’t have enough cash for a down payment.  As Mel Watt, the director of the Federal Housing Finance Agency (FHFA) explained, “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 oversees Fannie and Freddie.  He elaborated that the new guidelines will add “another much-needed piece to the broader access-to-credit puzzle.”  In addition, the government has developed other policy initiatives aimed at making lenders “mort comfortable” with the guidelines.  Watt hopes that, in turn, those lenders “will loosen their purse strings.”
How Will the New Guidelines Affect Mortgages?
According to Dan Gjeldum, the senior vice president at the mortgage lender Guaranteed Rate, the new guidelines are “a very big deal,” since they’ll “dramatically reduce the expense for a first-time homebuyer.”  Gjeldum explained that, “the easier it is to do business with the agency, the easier it’s going to be for consumers to work with mortgage companies.”
It’s important to understand that home loans aren’t coming directly from Fannie Mae and Freddie Mac.  Rather, mortgages backed by the agencies work like this: when a certain mortgage meets the Fannie and Freddie requirements, a lender will sell the mortgage to the agencies.  In turn, Fannie and Freddie will “package them into securities and sell them to investors.”  These investments are guaranteed, “which means that investors recoup losses if the homeowner defaults.”  In other words, a guaranteed mortgage looks better to investors, since they’re not taking a huge risk.
However, such assurances have resulted in a “more cautious lending environment,” which tends to hurt potential new homeowners who have good credit but don’t have enough cash for a 5 percent (or more) down payment.  The average FICO credit scores for borrowers was between 742-744 for Freddie Mac and Fannie Mae in 2013.
Since borrowers who make a down payment of less than 20 percent usually will pay more for insurance until their home equity hits 20 percent, that’s actually good news for the insurance industry.  In short, borrowers who get a mortgage with only a 3 percent down payment will have a longer mortgage insurance period.  The FHFA hopes that its new guidelines will prevent housing recovery from stagnating further.
Do you have questions about buying a foreclosure or learning more about your rights as a consumer?  Contact an experienced Chicago consumer protection lawyer at the Emerson Law Firm today.
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