Fannie Could Curb Low-Down Payment Loan Purchase

Fannie Mae is in discussions to curb its purchases of mortgages that require a minimum down-payment of 3%, according to people familiar with the discussions.Fannie never stopped accepting purchases of loans with 3% down payments, even after lending standards were ratcheted up following the housing bust. But many lenders stopped offering them, in part because they weren’t able to obtain mortgage insurance for those loans, which Fannie requires.In recent months, however, a series of changes in the mortgage market have led to an uptick in low-down-payment loans available for sale to Fannie. That prompted a review of the company’s lending policies, and officials are said to be working on a plan to limit the company’s purchases of these loans. The changes aren’t being made because of immediate problems with loan performance, according to people familiar with the discussions.Freddie MacFMCC -3.94% stopped backing such mortgages several years ago and requires a minimum 5% down payment. Any loans without a 20% down payment at both companies must have mortgage insurance or some other type of so-called “credit enhancement.”One proposal would be to continue purchasing only those sold by housing-finance agencies, which typically require home buyers to complete financial counseling. “We regularly review our standards and guidelines,” said Andrew Wilson, a Fannie Mae spokesman. “Any changes to our guidelines will be communicated to the market at the appropriate time.”Even though Fannie hasn’t bought many of these loans, low down-payment loans have remained widely available throughout the housing downturn largely due to federal agencies, including the Federal Housing Administration, which insures mortgages with down payments of 3.5%. Veterans and rural homeowners can still obtain loans without any down payment through separate federal agencies, though they face some restrictions.But Fannie is seeing more low-down-lending headed its way in part because the FHA has recently increased rather sharply the insurance premiums charged to borrowers. Private mortgage insurance companies, meanwhile, have begun to remove certain restrictions, or so-called “overlays,” that had limited the loans to a smaller group of borrowers. Better terms and growing availability of private mortgage insurance has made it possible for more lenders to offer low-down-payment mortgages that can be sold to Fannie.Fannie doesn’t disclose how many home-purchase loans it purchases or guarantees with 3% down payments, but private mortgage insurers have reported an uptick in their insurance volumes of those loans. MGIC Investment Corp. said its 3%-down loans accounted for around 5% of its business during the second quarter, or around $480 million. That was up from 2.8% in the year-ago period, or around $165 million.Some mortgage bankers say the change being considered by Fannie wouldn’t be that disruptive to the market because the FHA will continue to accept loans with 3.5% down payments, even though those loans are more expensive. “An awful lot of people who have only got 3% down would be advised to save another 2%. That’s an old hard-headed answer, but it’s true,” said Lou Barnes, a mortgage banker in Boulder, Colo.The higher insurance premiums that borrowers have to pay on a mortgage with a 3% down payment, versus one with a 5% down payment, is often enough to warrant “waiting six months or a year to save up the extra down payment,” he says.Loans with little or no down payment helped fuel the housing bubble, though many of those loans failed because of other features, such as resetting interest rates that sent payments higher or because borrowers weren’t required to document their incomes. Today, low-down-payment loans remain limited to a handful of products, such as 30-year, fixed-rate mortgages, and they require careful underwriting of a borrower’s income and assets.