SAN DIEGO — The Federal Housing Finance Agency and at least one of the federally-backed buyers of mortgages appears ready to double down on their pledge last year to expand lending to borrowers who otherwise might be difficult to qualify for traditional loans, with Freddie Mac hinting that even more low down-payment loan programs could be on the way.
Freddie Mac CEO Donald Layton told an audience at the Mortgage Bankers Association annual convention in San Diego on Monday that the surprise announcement last year by FHFA Director Mel Watt instructing his company and Freddie Mac to buy loans with down payments as low as 3% was a net positive and that more low down payment products could be on their way in the next year or so.
Currently, mortgages with less than 3% down payments comprise about 11% of the overall mortgage market, according to RealtyTrac, an Irvine, Calif.-based real-estate research firm. After the mortgage crash, most low down payment loan products evaporated because they were seen as too risky.
“There are still some nooks and crannies left in the mortgage market to fill,”, Layton said. Many self-employed borrowers have difficulty qualifying for a home loan under federal lending rules and need to develop loan products that can qualify them, he said. Most big bank lenders who sell their loans to the government’s big mortgage buyers have been reluctant to make loans to otherwise qualified individuals who don’t have a steady income. Even former Federal Reserve Chairman Ben Bernanke last year lamented that because he had gone from a federal job with a verifiable salary to being a more well-compensated lecturer with variable income, he couldn’t qualify for a home loan under federal government underwriting requirements for income.
Without government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac expanding the credit box, Layton warned, Freddie Mac’s future profits could be hurt as “borrowers are voting with their feet” and going to smaller community banks rather than bigger lenders, as smaller banks can often keep loans on their own books and make their own loan deals, rather than conform to rigid and conservative income requirements, and sell the loans to Fannie Mae and Freddie Mac.
Overall, the U.S. mortgage market appears to be finally recovering from the real estate crash of 2009-2010, with credit expanding and cash sales declining to their lowest level since December 2009. The Mortgage Bankers Association said Monday that it upped its estimate for 2015 mortgage originations to $821 billion, up from $801 billion in July. It also upped its estimate for 2016 by $20 billion to $905 billion.
Offering a higher number of low down-payment options to the market could create a replay of last year when congressional critics of FHFA and Fannie Mae and Freddie Mac faulted the plan, saying it could return the mortgage markets to precrash conditions, when borrowers with little of their own money invested in a home simply walked away. Fannie Mae and Freddie Mac required nearly $200 billion in bailout funds after many mortgages they bought defaulted.
Currently, Fannie Mae and Freddie Mac are under the conservatorship of the FHFA, and Layton told mortgage bankers it was likely to stay that way for the foreseeable future. “We’re still several years away” from a reform measure that could bring the two big mortgage backers out from under the FHFA’s control, he said. The FHFA was created in the aftermath of the mortgage market collapse when pools of mortgage backed securities that were thought to be safe investments turned out to contain hundreds of risky loans that later defaulted, bringing down both Fannie Mae and Freddie Mac, as well as investment banks like Bear Stearns and Lehman Brothers.