Fannie Mae relaxes loan down-payment requirements
By Lynn Adler
NEW YORK (Reuters) - Fannie Mae, the largest U.S. home funding source, is setting a single national standard for down payments on mortgages it buys, including areas where home prices are falling, in an effort to stimulate the housing market.
On loans it purchases, the company will accept down payments as low as 3.0 percent for single-family, primary residences in all U.S. markets starting June 1. That replaces a policy set in December that mandated higher down payments in markets where home prices are dropping, Fannie Mae said on Friday.
The rule change comes as many in the housing industry call for Fannie Mae <FNM.N> and Freddie Mac <FRE.N>, the second-largest federally chartered home funding company, to make more affordable housing available. The two government-sponsored, shareholder-owned companies buy mortgages, freeing up funds for more lending.
Fannie Mae's new down payment policy is a "sound" move that could help unfreeze the U.S. housing market and uncover pent-up demand for mortgages, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said on Friday.
"It's still sound underwriting and makes sense in this type of market," he told reporters after a speech at a Federal Reserve Bank of Chicago conference. OFHEO is the regulator for Fannie Mae and Freddie Mac.
Both companies have tightened standards on loans they purchase, such as mandating higher credit scores, and have raised fees to better reflect risk as defaults and foreclosures escalate.
Fannie Mae "will be equalizing the down payment requirements for borrowers in all parts of the country, regardless of local market conditions," Marianne Sullivan, senior vice president of single-family credit policy and risk management, said in a news release.
U.S. home prices have tumbled nearly 16 percent from their June 2006 peak, according to the Standard & Poor's/Case-Shiller index of 20 metropolitan areas. The biggest losses are mainly in areas that had the most sweeping gains in the five-year record housing surge earlier this decade.
Lenders grappling with fast-souring mortgages on their books are reluctant to create new ones despite government interventions and a series of interest rate cuts from the Federal Reserve, said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta.
Borrowers with high-cost adjustable mortgages who initially could not afford to refinance into fixed rate loans may benefit most from lower down payments, Miller said.
"Relaxing standards in areas where prices are falling suggests that we're going to some of the more damaged regions of the country -- there are very few markets where prices aren't falling -- and allow some of those households the opportunity to refinance back toward solvency or allow another cohort of potential housing demand," Miller added.
Fannie Mae will accept up to 97 percent loan-to-value ratios for conventional, conforming mortgages through its automated underwriting system, and ratios of up to 95 percent for other loans. A conforming mortgage meets the requirements for loans that Fannie Mae and Freddie Mac can purchase.
Freddie Mac early this month instituted a 95 percent loan-to-value floor for mortgage it buys, so the down payment can't increase to more than 5 percent of the estimated value, according to spokesman Brad German. It accepts lower down payments on some affordable loan products, he said.
"We are able to adopt this new, national down payment requirement, even in markets where home prices are declining, because our new automated underwriting risk assessment model ... will limit risk layering and assess each loan more precisely," Sullivan added.
The size of conforming loans was temporarily increased in March by their regulator to as high as $729,000 in high-cost areas from $417,000, in an effort to stimulate lending in one of the worst U.S. housing markets since the Great Depression.
Fannie Mae also said it would continue to allow loans with Community Seconds, in one of various assistance programs, for up to 105 percent combined loan-to-value ratio.
With Community Seconds, a borrower has a second-lien mortgage to help cover down payment and closing costs, with funding usually provided by a state or local housing agency, employer or a nonprofit organization.
"We recognize that down-payment assistance programs remain a viable tool for borrowers who can afford a mortgage long-term, but might need a little help getting started," Sullivan said.
On May 6, when Fannie Mae reported first-quarter results, it announced other initiatives, including a plan to provide up to $10 billion to help Housing Finance Authorities (HFA) serve first-time homebuyers "of modest means." In some cases, Fannie Mae said, it will buy HFA mortgages that have greater than 97 percent loan-to-value ratios.
(Additional reporting by Ros Krasny in Chicago; Editing by Frank McGurty)