Fannie Mae and Freddie Mac have set terms for letting borrowers put down as little as 3% of a home’s cost to get mortgages, a step criticized by Republican lawmakers as a return to risky lending.
Starting on Dec. 13, Fannie Mae will allow the lower down payments for first-time homebuyers and permit refinancing borrowers to reduce equity to 3% to cover closing costs, the company said today in a statement. Freddie Mac will begin a more limited program in March giving breaks to lower-income buyers and first-time borrowers who get housing counseling.
“These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices,” Mel Watt, who oversees the two U.S.-owned companies as head of the Federal Housing Finance Agency, said in a statement.
Watt encouraged the move as part of a broader effort to spur lending to minorities, young adults and first-time buyers. Lenders have tightened standards after paying tens of billions of dollars to settle lawsuits over mortgage-underwriting flaws.
Fannie Mae and Freddie Mac, which buy more than half of new home loans and package them into bonds, currently allow down payments as low as 5%. Fannie Mae accepted 3% down as recently as November 2013 before increasing the requirement in a tightening of its underwriting standards.
The move to allow lower down payments has generated criticism from some Republicans and industry officials. Representative Jeb Hensarling of Texas, the chairman of the House Financial Services Committee, has faulted the idea as a return to the policies that caused the housing crash.
Officials of Fannie Mae and Freddie Mac said rules banning risky loan features will ensure that the new low-down-payment mortgages are safe. Only borrowers buying or refinancing a single-family primary residence will be eligible.
Fannie Mae will allow borrowers who haven’t owned a primary residence within the last three years to qualify. Freddie Mac’s program will be limited to people who’ve never owned a home or those with moderate incomes or who are buying in underserved areas.
Borrowers who currently have loans backed by the two companies will be allowed to refinance with as little as 3% down. Fannie Mae borrowers will be allowed to take cash out for closing costs; Freddie Mac borrowers will not.
A study of Fannie Mae data by the Housing Finance Policy Center at the Urban Institute found that credit scores had more bearing than down payment size on whether borrowers defaulted.
The study concluded that allowing loans with down payments between 3% and 5% is likely to have a negligible effect on mortgage risk. These loans made up only about 1% of Fannie Mae originations when they were previously allowed.
Regulators seized the two companies in 2008 and taxpayers spent $187.5 billion to keep them afloat. Fannie Mae and Freddie Mac have since made about $225.5 billion in dividend payments back to the U.S. Treasury, which takes all of their quarterly profits.