Fannie, Freddie to Jockey Over Low Down Payment Loans

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WASHINGTON — A new battle is brewing between Fannie Mae and Freddie Mac as the government-sponsored enterprises set out to boost their purchases of low down payment loans.

In order to meet new affordable housing goals, the two are likely to be directly competing for low down payment loans bought by local housing finance agencies.

But the two GSEs are not equally matched. Fannie has developed and maintained relationships with state housing finance agencies for nearly a decade, with 39 state agencies selling loans to the GSE. Freddie, meanwhile, has been out of the market for several years and is just now trying to get back in.

Still, Freddie is adding enticements and many housing finance agencies are signing up.

Freddie is "providing white glove service where they are providing hands-on support and training," said Jason Boehlert, executive director of the National Association of Local Housing Finance Agencies, in an interview.

The interest in low down payment loans has increased during the past year.

Fannie and Freddie announced in December that they would start buying 97% loan-to-value single family loans from lenders this year. As of June 30, Fannie has purchased 9,000 loans with 3% down payments. Freddie began buying such loans directly from lenders in March, but has not yet disclosed the number.

So far, the results have been disappointing. But that puts new emphasis on the GSEs' relationship with local housing finance agencies, which are the source of many low down payment loans.

Adding to the mix, the Federal Housing Finance Agency finalized new affordable housing goals on Aug. 19 that require the GSEs to buy more single-family loans from borrowers with below median income levels, consumers most likely to need a low down payment loan.

To help meet the goal, Freddie has teamed up with Minneapolis-based US Bank as a source for housing finance agency loans. The institution has a mortgage revenue bond program that provides services to state and local agencies, including purchasing loans from them. Fannie has a similar relationship with US Bank.

State housing finance agencies in New England are doing a lot of business with Fannie, according to Simon Tahan, a senior vice president with Webster Bank in Waterbury, Conn.

He said Webster spends a lot of effort on educating homebuyers to get them into the right financing program.

"Recently we have seen the state agencies programs become more appealing to first-time homebuyers," said Tahan, saying that private mortgage insurance is less expensive than Federal Housing Administration insurance.

Housing finance agencies also offer FHA-insured loans, which have more lenient credit guidelines than Fannie loans.

The Connecticut Housing Finance Agency has been participating in the Fannie affordable housing program since the summer of 2013.

"HFAs used to have a monopoly on the 97% product," said Norbert Deslauriers, CHFA interim executive vice president. "In December, they opened it up to all lenders."

Housing finance agencies also provide down payment and closing cost assistance. CHFA rolls this assistance into a 30-year second lien with the same interest rate as the first mortgage.

Deslauriers expects lenders will continue to sell their loans to the housing finance agencies to escape the loan level price adjustments that Fannie charges borrowers with low credit scores. Fannie doesn't charge LLPAs on loans bought by housing finance agencies.

"If the lender sells to Fannie, Fannie will hit them with LLPAs. If we buy the loans from the lender, there is no LLPA," Deslauriers said. Freddie also eliminated LLPAs on HFA loans.

Overall, the performance of housing finance agency loans from a delinquency and loss prospective is better than the loans lenders sell directly to Fannie, according to the Massachusetts Housing Finance Agency executive director Tom Gleason.

MassHousing purchased 3,200 low-down payment loans from lenders totaling $725 million for the year ending June 30, 2015. MassHousing has a 3.2% delinquency rate (30 days or more delinquent), below the state average of 5.2% and the FHA's rate in Massachusetts of 9.4%.

Gleason stressed that the HFA performance is due to "old school underwriting," verification of income and deposits as well as housing counseling.

MassHousing has a "strong relationship" with Fannie, Gleason said, and over the years the GSE has allowed his agency to expand its first-time buyer program to include rate- and term-refinancings and financing for repeat buyers.

But Fannie has also taken steps to make it easier to buy low down payment loans either from housing finance agencies or directly from lenders. It announced Aug. 25 it was making enhancements to its affordable housing program, renaming it "HomeReady."

The new HomeReady mortgage program will reduce or cap LLPAs to make the 3% down payment loans more affordable. In addition, the 3% down payment product will be available to repeat buyers for the first time. The previous product offered by Fannie was limited to first-time buyers.

Fannie is also loosening the debt-to-income ratios and income requirements to help multi-generational and extended families qualify for a HomeReady mortgage. Rental income from a basement apartment will count toward the borrower's qualifying income. Fannie will start accepting loan deliveries for HomeReady mortgages later this year.

Despite the changes, Jennifer Whip, Fannie vice president for customer engagements, expects housing finance agencies to remain competitive.

"Due to the performance that we see with the housing finance agency business, we have maintained some distinct advantages for the HFAs that will continue," she said.

The housing finance agencies provide on-going support for borrowers during the home buying process and after the closing, which helps buyers remain in their homes long-term.

"It leads to very strong performance," Whip said.

This support will be particularly helpful, she said, for borrowers who are new Americans or second generation that don't have a history of homeownership.

"Fannie is simply moving closer to the Home Possible affordable mortgage product that Freddie announced in December," said Danny Gardner, vice president for affordable lending at Freddie.

"Freddie Mac is always looking to expand access to mortgage credit for aspiring homeowners, including multigenerational households and borrowers using nontraditional sources of income for homeownership," Gardner said.

Barbara Thompson, the executive director of the National Council of State Housing Agencies, welcomed Fannie's recent announcement.

"This just seems to be another good step forward in creating greater access to credit for lower income homebuyers," she said. "This product will be very helpful to people who don't have the traditional profile in terms of where their income is coming from."

The HomeReady program is designed to respond to the next wave of homebuyers — millennials and minorities, according to Gleason at MassHousing.

"There will be a bigger concentration of households that live together and save money together," he said. "We are going to look very carefully at this HomeReady product and see what we are comfortable adopting."

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