According to FHFA Director Melvin J. Watt, whose agency is the conservator with oversight responsibility for Fannie and Freddie, the government’s new guidelines “provide a responsible approach to improving access to credit while ensuring safe and sounding lending practices.”
Under the rule change, both Fannie and Freddie will now consider mortgage applications from buyers who wish to put as little as 3 percent down on their purchase or refinancing loan. But despite a loosening of credit history and score requirements for some buyers, officials stress that buyers must still demonstrate creditworthiness, show stable employment and income and meet other key criteria.
According to regulators, industry insiders and economists, low-income families are expected to be the greatest beneficiaries of this rule change. Many families with modest savings reserves and tight budgets are unable to afford 20 percent down payments on even modestly priced homes. Low-income heads of household also tend to have lower credit scores and spottier credit histories than middle- and upper-class buyers, reducing their attractiveness to tight-fisted lenders
Overall U.S. homeownership is at multi-decade lows, and first-time homebuyers are closing at rates 25 percent lower than the historic average. Economists attribute these trends to a number of related factors, including traditional lenders’ stringent buyer credit standards and down payment requirements that remain out of reach for young, working-class buyers.
The government’s plan, first reported in the New York Times, emulates affordable mortgage programs successfully offered by independent mortgage banks like Prospect Mortgage, a buyer-friendly home mortgage and refinancing company run by Fannie Mae veteran and former CEO Michael Williams.
Both government programs offer fixed-rate mortgages on primary residence purchases. Fannie’s My Community Mortgage program builds on the “customer-first” culture that Mr. Williams fostered during his tenure as Fannie Mae CEO, while Freddie’s Home Possible Advantage harnesses Williams’ best practices to reach an even broader pool of potential eligible homebuyers.
During Williams’ tenure as CEO, Fannie dramatically reversed its slumping fortunes, turning a $23 billion loss in the quarter just prior to his promotion into a $5.1 billion profit just prior to his departure. The experience of turning around the storied mortgage issuer, says Williams, prepared him for his current role as a leader and an innovator in the world of purchase mortgage and refinancing products.
Unlike many of its larger competitors, Prospect Mortgage has increased the volume and value of issued loans in recent years, reaching thousands of prospective buyers and refinancing candidates who might otherwise be unable to find or afford financing. Though it’s too early to judge the efficacy of the new programs, Fannie and Freddie may see similar surges in buyer interest.