Fannie And Freddie Throwing Caution To The Wind: 3% Downpayment Loans!

Mortgage recently carried a story (“Fannie Moves Aggressively on New Low-Down-Payment Loans”) by Kate Berry reporting on Fannie’s and Freddie’s [collectively, “GSEs”[1]] venture back into more risky lending. Perhaps the GSEs’ near-death experience in September-October 2008 did not leave a sufficiently lasting impression….

Here are snippets of the article:

  • Fannie will begin taking applications for borrowers with FICOs as low as 620;
  • They will also permit limited cash outs [not from equity, but for closing costs up to $2,000] for refinancings]; 
  • Freddie, perhaps like the wise wildebeest about to cross the alligator-infested river, is standing on the shore, waiting to see if Fannie makes it to the other side in one piece;
    • If all goes well, Freddie will roll out its program on March 23, 2015;
    • It will require that borrowers first obtain credit counseling; and
    • Is requiring a higher minimum FICO of 660;
  • The program is intended to draw first time buyers from the sidelines, by permitting them to qualify with as little as 3% down payment;
  • Apparently, Fannie is more experienced with low down payment programs, due to its having made them through state housing finance agencies;
    • “’We are comfortable with these loans based on the performance of loans we’ve acquired previously, our underwriting standards and our risk management practices,’” [Andrew Wilson a Fannie spokesman] said in an email.”
    • However, according to the article, “Fannie declined to provide default data on the low down payment loans it currently offers through housing finance agencies.”
    • Hmmm. They tout their greater experience, but won’t release their default data – what’s that tell you?

Here is the rub: Lenders are gun-shy of the GSEs’ 3% down payment program, because they remember well when the GSEs forced them to buy-back billions of dollars of loans because they were ostensibly poorly underwritten. As a result, many lenders today are requiring their borrowers exceed the GSEs’ current standards.  So, having been burned once, after making risky loans under government pressure, it remains to be seen whether lenders will embrace these new low down payment programs.


[1] “Government Sponsored Enterprises.”