Fannie Mae and Freddie Mac’s new low down payment loans products may not represent such a risk to the Federal Housing Administration program as some have feared.
The more Federal Housing Finance Agency director Mel Watt talks about the yet to be unveiled 3% and 5% down payment products, the less likely they seems to be game changers.
These 95% and 97% loan-to-value products will be targeted at creditworthy borrowers with “stronger credit histories or lower debt-to-income ratios,” Watt told the Senate Banking Committee on Nov. 19.
The major factor holding these borrowers back is that they don’t have the “money to make a large down payment and pay for closing costs,” Watt said. The GSE regulator also noted that housing counseling would be a compensating factor.
Jay McCanless and Annie Worthman, analysts at Sterne Agee, said that the compensating factors outlined in Watt’s testimony will be do little to change the “demand calculus” for low-down payment loans.
“In our view, the potential increase in qualified borrowers would be marginal at best because willing borrowers/home owners with these attributes would likely be financed under programs from either the Veterans Administration or the Federal Housing Administration, which already permits high-LTV loans like the FHFA is contemplating,” they wrote in a note to clients.
Compensating factors for the new Fannie and Freddie products are important, according to Isaac Boltansky, an analyst at Compass Point.
“But we continue to believe that the more significant determinant of the 3% down-payment’s impact will be the FHFA’s forthcoming pricing decisions with regard to guarantee fees and private mortgage insurance,” Boltansky said in a Nov. 19 report.
FHFA is expected to release the details of the new loan products soon.
Analysts have also warned that the FHA single-family program faces headwinds going forward due to the new competition from Fannie Mae and Freddie Mac.
FHA’s bread and butter is insuring loans with down payments as low as 3.5%. But FHA is currently charging high premiums to re-capitalize its mortgage insurance fund, which could give Fannie and Freddie the edge.
“FHA could be adversely selected,” if it has to compete with the Fannie, Freddie and the private mortgage insurance companies, according to a recent Federal Financial Analytics report.