FHFA defends lower downpayments

WASHINGTON – Jan. 29, 2015 – New programs that back mortgages with downpayments as low as 3 percent are "just as safe" as a loan with a 10 percent downpayment, Melvin Watt, director of the Federal Housing Finance Agency (FHFA), assured lawmakers Tuesday.

When FHFA, the regulator of Fannie Mae and Freddie Mac, announced last year that first-time buyers could qualify for loans with downpayments as low as 3 percent, some experts feared that the move could stir a wave of future defaults. Some lawmakers worry that smaller downpayments could lead to the irresponsible lending practices blamed for the last housing crisis. Others express concern that smaller downpayments will allow buyers to purchase homes they really can't afford.

The change was done to expand credit to qualified home shoppers sidelined from the housing market over the last few years due to high downpayment requirements.

"When the downpayment is lower, there's the potential it can be a riskier loan," Watt told lawmakers. "But when you pair that with other compensating factors … you offset that additional risk. That's exactly what we've done."

To qualify for the smaller downpayment loans, Fannie and Freddie require full documentation, strong credit scores, housing counseling and private mortgage insurance, Watt said. Also, the loans will comprise only "a very small percentage" of the mortgages in Fannie Mae and Freddie Mac's portfolios.

Fannie began backing the loans with the smaller downpayments in December; Freddie will begin in March.

"If somebody can't pay a loan, they shouldn't be given a loan," Watt told lawmakers. "It would be irresponsible to say we should be making those loans, or that Fannie and Freddie should be backing those loans." Watt argued that the smaller downpayments would allow those who have not been able to save enough for a large downpayment to break into homeownership sooner.

The National Association of Realtors® (NAR) has voiced support for the smaller downpayments.

"Realtors support responsible lending to qualified buyers, which is essential for building strong communities," NAR President Chris Polychron said in a statement released Tuesday. "NAR research shows that saving for a downpayment is the biggest hurdle to homeownership for many first-time buyers, who have been entering the market at lower than normal rates. Improved access to safe, affordable mortgage credit through FHFA's 3 percent downpayment program will help new borrowers achieve the dream of homeownership."

Housing and Urban Development officials also defended the Federal Housing Administration's (FHA) move to lower annual premiums on its insurance, which could save a typical first-time homebuyer about $900 a year.

FHA, which insures home loans with downpayments as low as 3.5 percent, dropped its annual premiums this week from 1.35 percent to 0.85 percent. Some lawmakers and critics have voiced concern that the lower premium could lead to another FHA bailout from taxpayers.

FHA regained its financial footing last year after requiring a $1.7 billion taxpayer bailout in 2013. But officials with HUD, FHA's regulator, said that the lower premiums will not come at a cost to taxpayers, and it will also help FHA increase its market share.

Source: "Fannie Mae, Freddie Mac Regulator Defends 3% Downpayment Mortgages," The Los Angeles Times (Jan. 27, 2015) and "FHA: Lower Premiums Will Not Cost Taxpayers," Realtor® Magazine Daily News (Jan. 27, 2015)