Mel Watt, Says Lower Mortgage Down Payments Come with a Catch

(Reuters) - Americans who borrow to buy homes with 3 percent down payments under relaxed government rules will have to meet extra requirements to show they can pay the loan, such as having strong incomes or credit histories, a top regulator said on Friday.

Mel Watt, director of the Federal Housing Finance Agency, announced last month that new rules were being developed to allow smaller down payments, part of a push to boost access to credit.

On Friday, he detailed how regulators hope to keep this from putting taxpayer money at additional risk. Government-controlled housing finance firms Fannie Mae and Freddie Mac guarantee most new mortgages in the United States, paying investors money when people default on their loans.

Watt said demanding "compensating factors" from borrowers would allow Fannie Mae and Freddie Mac to guarantee mortgages and also "appropriately manage" their risks.

These factors would include requiring borrowers to go through housing counseling or have stronger credit histories. They might also need higher incomes relative to the size of their loans, Watt said.

Low down-payment borrowers would also have to pay for private mortgage insurance, a measure that aims to further shelter taxpayers.

"We know that the size of a down payment, by itself, is not the most reliable indicator of whether a borrower will repay a loan," Watt told a realtors conference in New Orleans.

Fannie Mae and Freddie Mac don't lend money directly, but rather buy mortgages from banks and resell them with a guarantee. Over the last few years, both had stopped accepting most loans with 3 percent down payments after being criticized with helping inflate a housing bubble that burst during the 2007-09 recession.

Watt, who was picked for his post by President Barack Obama, has made extending access to credit a priority since he took the helm at the FHFA in January.