WASHINGTON -- Housing finance giants Fannie Mae and Freddie Mac on Monday detailed plans to again back mortgages with down payments as low as 3 percent, 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, the Federal National Mortgage Association.
"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.
The new lending guidelines are designed to help more low-income and first-time buyers afford homes. Millions of Americans lost their savings or no longer had the income needed to set aside money for a home in the aftermath of the 2008 financial crisis and recession. That has held down the sales of houses and condominiums and slowed the economic recovery. The National Association of Realtors said 29 percent of home purchases in October went to first-time buyers, compared with a historic average of 40 percent.
Officials said the program is designed to help creditworthy 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 percent down payment.
Both Fannie and Freddie had previously accepted 3 percent down payment mortgages. Since 2011, Freddie Mac has required at least a 5 percent down payment on loans it would back. Fannie Mae has required a 5 percent down payment since last year.
The two firms will offer somewhat different programs.
Freddie Mac, the Federal Home Loan Mortgage Corp., will limit its program, called Home Possible Advantage, to mortgages for first-time homebuyers. Borrowers must participate in a homebuyer education and counseling program before receiving the loan and will have to pay for private mortgage insurance.
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.
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.
"These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices," Melvin Watt, director of the Federal Housing Finance Agency, said in a statement. The agency oversees Fannie Mae and Freddie Mac, which have been under government control since 2008 because of the housing bust.
Watt had announced in October that Fannie Mae and Freddie Mac had reached an agreement with major banks to expand lending. The Federal Housing Finance Agency declined Monday to say how many borrowers might benefit from a 3 percent down payment.
Fannie Mae could begin underwriting the loans before the end of the year. Freddie Mac intends to begin offering its mortgages as early as March 2015. The two loan handlers own or guarantee about half of all U.S. mortgages, worth about $5 trillion. Along with other federal agencies, they back roughly 90 percent of new mortgages.
The two companies don't directly make loans to borrowers. They buy mortgages from lenders, package them as securities, guarantee them against default and sell them to investors. That helps make loans available.
The government took over Fannie Mae and Freddie Mac in September 2008, after a market meltdown compounded the losses caused by risky mortgages and threatened to shut down the entire housing sector. Combined, the firms received taxpayer aid totaling $187 billion, which has since been repaid as they have returned to profitability.
The move to allow lower down payments has generated criticism from some Republicans and industry officials. Rep. Jeb Hensarling, R-Texas, the chairman of the House Financial Services Committee, has faulted the idea as a return to the policies that caused the housing crash.
"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.
Some lenders were also 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 percent 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 Los Angeles Times.
Information for this article was contributed by Jim Puzzanghera and E. Scott Reckard of the Los Angeles Times, Josh Boak of The Associated Press, Clea Benson of Bloomberg News and Dina ElBoghdady of The Washington Post.
A Section on 12/09/2014