At the MBA Annual Conference in Las Vegas in October, FHFA Director Mel Watt announced that Fannie Mae and Freddie Mac will soon start purchasing mortgages with as little as 3% down payments.
The GSEs have been requiring a minimum of 5% down. Clearly, this new announcement is in response to the GSEs' dismal record of serving first-time and minority homebuyers during the last several years.
Going from 5% to 3% may seem like a small difference, but depending on the details, it could mean thousands of new buyers into the market.
Of course many of the usual critics, such as Rep. Jeb Hensarling and Mark Calabria from the Cato Institute, immediately blasted the announcement with their knee-jerk perspectives, including "a return to slipshod and dangerous practices" and "this just the camel’s nose under the tent." Some lenders have even said they will not originate the higher loan-to-value loans. Ideologues aside, almost anyone truly familiar with the facts knows that it wasn't low-down-payment mortgages that caused the housing crisis.
FHA and VA have been successfully insuring 3.5% and 0% down payment mortgages respectively for decades. Earlier this week the FHA announced that despite being sucked into the red by a crisis it did not create, its reserve fund was solidly in the black, once again proving that with sound underwriting, LTV has little effect on loan performance. So if it wasn't high LTVs that caused the crisis — what did?
The fact is it that it wasn't stated income, reduced docs or even subprime that caused the crisis, either. It was the combination of all of the above — a widely understood underwriting concept known as layered risk, along with some powerful external forces — that created the perfect storm.
In response to the crisis, Congress passed the much-criticized Dodd-Frank Act and with it launched the Consumer Financial Protection Bureau. Charged with the daunting responsibility of retooling our flawed regulatory apparatus, the CFPB immediately put into place a make-sense rule for all mortgages that requires the lender to establish a borrowers "ability to repay," also known as ATR, which in itself essentially makes the kind of layered risk we saw earlier in the century a permanent thing of the past.
Last month, the National Association of Realtors reported that first time homebuyers accounted for the smallest percentage of the market than at any time in recent history. This is not a sustainable trend. The housing market cannot fully recover without a large and steady supply of first-time buyers.
As baby boomers continue to downsize and move-up buyers need to sell their starter homes, more first time buyers are needed to keep a healthy balance of supply and demand. In short, the lending pendulum has swung too far the other way.
Many of today's potential homebuyers are minorities with little generational wealth, making low-down-payment mortgages essential if the nation is to benefit from the buying power they represent. A growing middle class is the key to a strong economy and sustainable homeownership is still the best gateway to the middle class for most Americans.
The economy needs more buyers in the market. It's a good thing that the FHFA is getting this; hopefully others in government and the private sector will soon follow.
Gary Acosta is the co-founder and CEO of the National Association of Hispanic Real Estate Professionals and a 25-year veteran of the real estate industry.