As the market inches closer to recovery, mortgage practices have been subjected to a variety of alterations. Recent months have therefore witnessed an increase in the amount of low down payment mortgages that Fannie Mae is willing to purchase. However, a review of their current lending practices have caused the mortgage giant to question whether or not the acquisition of such assets remains in their best interest. As a result, Fannie Mae is currently in discussions to curb its purchases of mortgages that require a minimum down payment of three percent.
Contrary to popular belief, Fannie Mae proceeded to purchase low down payment mortgages in the wake of the recent bubble crisis. Several other lenders, however, discontinued similar practices because they were not able to obtain mortgage insurance for loans with low down payments.
According to sources, it would appear as if Fannie Mae is now considering the discontinuation of low-down-payment mortgage purchases, or at least reducing them. A recent review of their lending policies suggests it would be in their best interest to limit the company’s purchasing of these loans. It is important to understand that these proposed changes are not the result of immediate problems, but more of a preemptive approach to avoid future complications.
Conversely, Freddie Mac has already stopped backing such mortgages. Several years ago, the mortgage specialists cut funding for mortgages with a minimum of five percent down. Any loans without a 20 percent down payment at both companies must have mortgage insurance or some other type of so-called “credit enhancement.”
In an effort to reduce the amount of these loans, Fannie Mae has entertained several proposals. One of which supports the idea of purchasing low down payment mortgages from housing-finance agencies, as they typically require prospective buyers to partake in financial counseling. “We regularly review our standards and guidelines,” said Andrew Wilson, a Fannie Mae spokesman. “Any changes to our guidelines will be communicated to the market at the appropriate time.”
While Fannie Mae has yet to purchase the majority of these loans, they remain readily available through federal agencies. Despite current market conditions, the Federal Housing Administration (FHA) continues to insure mortgages with down payments as low as 3.5 percent. Furthermore, the FHA was recently granted permission to increase insurance premiums charged to borrowers. As a result, Fannie Mae should see more low-down lending heading its way.
Meanwhile, private mortgage insurance companies have begun to remove certain restrictions. The resulting terms have made it possible for more lenders to offer low down-payment mortgages that Fannie Mae is willing to purchase, ultimately reducing some of the challenges facing first-time buyers.
It is generally accepted that lenient loan practices resulted in the previous housing bubble. However, it should be known that many of the loans defaulted because of subsequent features. For instance, resetting interest rates proceeded to increase payments beyond what the lender was capable of paying. The wake of the housing sector decline has therefore limited low-down-payment loans to a few select services. Low down payment mortgages can often be seen in 30-year, fixed-rate mortgages with careful underwriting.
