The U.S. government just gave first-time homebuyers and other budget-minded house shoppers a big boost with a sweeping rule change that provides federal backing to mortgages with down payments as low as 3 percent. The change manifests in two parallel programs: Fannie Mae’s My Community Mortgage and Freddie Mac’s Home Possible Advantage.
The programs both offer fixed-rate loans for candidates’ primary residences. My Community Mortgage, which opened to buyers and owners in early December, offers loans to applicants with credit scores as low as 620. Its refinancing component will initially be limited to candidates who currently hold Fannie mortgages. Home Possible Advantage, which begins in March, may be open to buyers with even lower credit scores and includes a no-cash-out refinancing program open to all mortgage holders, not just current Freddie customers. It also doesn’t establish a hard credit score floor for purchase loans, broadening the pool of potential borrowers.
These programs represent the government’s latest effort to assist first time homebuyers and other qualified borrowers to enter the market and become homeowners, but they’re not exactly groundbreaking. Private companies like Prospect Mortgage, a leading national independent mortgage banker led by Fannie Mae veteran (and former CEO) Michael Williams, have offered HUD eligible purchase and refinancing products with low down payments for years.
During Williams’ tenure, Fannie Mae faced down an existential crisis—the quarter prior to his tenure saw a shocking loss of more than $23 billion—and emerged with its strongest balance sheet and loan pipeline in years. After serving as Board Chairman for over a year, Mr. Williams took on the additional role of CEO at Prospect Mortgage in mid-2014) shortly after returning Fannie to a $5 billion quarterly profit, cementing his reputation as a fearless reformer.
The new Fannie and Freddie programs build on the foundation Mr. Williams laid during his tenure as Fannie CEO. Both promise to reduce barriers to entry for first time homebuyers currently priced out of the housing market.
Despite surging profits at Fannie and Freddie, the housing market recovery remains patchy, disproportionately favoring higher-income buyers and those who already own a home. According to the New York Times, the U.S. homeownership rate currently sits near 64 percent, a multi-year low. And first time homebuyers make up just 29 percent of the pool of prospective buyers, far below the 40 percent historic average.
Structural factors, such as stagnating wage growth at the lower end of the income scale, account for some of the discrepancy. But other factors, including traditional mortgage issuers’ overly strict lending criteria and onerous down payment requirements for first-time buyers and refinancing candidates, are a direct legacy of the recent housing bust.
My Community Mortgage and Home Possible Advantage could significantly improve buyer access at the lower end of the income scale, though experts are divided on just how much help they’ll provide. And Andres Carbacho-Burgos, a respected Moody’s economist, warned that any broadening of access would have to be accompanied by a renewed focus on mortgage monitoring and buyer counseling programs to safeguard against a rise in default rates.