Fannie & Freddie Detail New 3% Down Payment Offerings

The two government sponsored enterprises (GSEs) announced details today of their respective new low downpayment conventional mortgage loans. Each will permit loans with as high as a 97 percent loan to value ratio with certain compensating factors.

Both Fannie Mae and Freddie Mac's loans must be secured by a single family owner occupied property. Only fixed-rate loans are eligible and manufactured housing is not acceptable collateral. Tt least one borrower must be a first time homebuyer and median income eligibility levels apply. The GSEs are also requiring a form of homeowner education, the type and duration of which varies between them.

Refinancing is permitted by both GSEs but on either a no-cash or a limited-cash out basis. Total combined loan-to-value (CLTV) ratios can go as high as 105 percent but the companies have limitations on the type of secondary financing permitted. The loans will require private mortgage insurance with 18 percent coverage for loans with a higher than 95 percent LTV.

Fannie Mae's version of the loan will be called My Community Mortgage® (MCM) and will be available for loan casefiles underwritten through Desktop Underwriter Version 9.2, which will be implemented the weekend of December 13, 2014. The company said the MCM is based on its earlier program offered through state Housing Finance Agencies. It will have the company's usual eligibility requirements including underwriting, income documentation and risk management standards. The loan will permit reserves to come from eligible gifts for both manually underwritten loans and DU loan casefiles.

"Our goal is to help additional qualified borrowers gain access to mortgages," said Andrew Bon Salle, Fannie Mae Executive Vice President for Single Family Underwriting, Pricing and Capital Markets. "This option alone will not solve all the challenges around access to credit. Our new 97 percent LTV offering is simply one way we are working to remove barriers for creditworthy borrowers to get a mortgage. We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers."

Fannie Mae is also expanding its standard loan offering to a 97 percent LTV where at least one co-borrower is a first time homebuyer.

Fannie Mae said that private capital will be in the first loss position on these loans. Mortgage insurers and other risk sharing partners will have to conclude that these loans are prudent to make in order for these loans to be originated and delivered to Fannie Mae in the secondary market. The company said it is making new tools available to help lenders better evaluate risk on loans. This will include making its Collateral Underwriter® appraisal tool available in early 2015 at no additional cost.

Freddie Mac is calling its loan "Home Possible Advantage" and will begin offering it on March 23, 2015. According to the sellers guide the company requires that manually underwritten mortgages have a minimum Indicator Score of 660 for purchase transactions or 680 for "no cash-out" refinance transactions; the monthly debt payment-to-income ratio must not exceed 43%, and at least one borrower must have a usable credit score and an Indicator Score must be established .

Dave Lowman, Executive Vice President, Single-Family Business at Freddie Mac said of the new loan offering, "Home Possible Advantage gives qualified borrowers with limited downpayment savings a responsible path to homeownership and lenders a new tool for reaching eligible working families ready to own a home of their own. Home Possible Advantage is Freddie Mac's newest effort to foster a strong and stable mortgage market."

Federal Housing Finance Agency Director Melvin L. Watt said "The new lending guidelines released today by Fannie Mae and Freddie Mac will enable creditworthy borrowers who can afford a mortgage, but lack the resources to pay a substantial down payment plus closing costs, to get a mortgage with 3 percent down. These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices.

"To mitigate risk, Fannie Mae and Freddie Mac will use their automated underwriting systems, which include compensating factors to evaluate a borrower's creditworthiness. In addition, the new offerings will also include homeownership counseling, which improves borrower performance. FHFA will monitor the ongoing performance of these loans."