For years now, if you didn’t have near perfect credit and a hefty 20% down payment, chances were slim that lenders would give you a mortgage.
But that’s all about to change.
That’s because Fannie Mae and Freddie Mac, the two government-backed mortgage giants that backstop a majority of all mortgages, have put new lending guidelines in place that should make it easier for borrowers to secure loans.
Not only are the two agencies lowering downpayment requirements and making it easier for loans to be classified as qualified mortgages, but more importantly, they have clarified when lenders will be on the hook if borrowers default.
In the past, Fannie and Freddie have been able to force lenders to buy back loans that have defaulted soon after it was issued, if any mistakes were made in the paperwork or if there was borrower fraud.
“Lenders have been real concerned about these buybacks,” said Doug Lebda, CEO of LendingTree. “If problems arise with loans, the [Fannie/Freddie] guarantee often fails when lenders need it the most.”
Mel Watt, the head of the Federal Housing Finance Agency, acknowledged that the previous policy made it hard for lenders to understand exactly when Fannie Mae or Freddie Mac would require the banks to repurchase loans.
Under the new rules, any loans with no missed payments for 36 consecutive months after they were first issued will be backed by Freddie or Fannie should they default. The agencies will also allow two missed payments in the first 36 months without forcing borrowers into foreclosure.
And if private mortgage insurance, which is required for all low downpayment mortgages, is rescinded, say due to errors made in the underwriting process, lenders will not automatically be required to repurchase the loans.
“That makes the Fannie/Freddie guarantees more like real insurance,” said Lebda.
According to Lawrence Yun, chief economist for the National Association of Realtors, the buyback issue has been “the number one hindrance to mortgage lending lately. If it disappears, it would be a big boost to mortgage lending.”
Freddie and Fannie have also said they will start backing 3% down loans. Borrowers can currently get 3.5% down loans from the FHA, although they require borrowers to pay mortgage insurance premiums for the life of their loans.
The new low down payment loans should help boost homebuying among low-income and first-time homebuyers, who have been conspicuously absent from the housing market over the past year
Lenders already seem to be loosening up a bit.
Mark Palim, who oversees economic and strategic research at Fannie Mae, said average credit scores for approved loan applications have dropped slightly over the past few months and lenders are doling out loans with lower downpayments as well.
According to the Federal Reserve, nearly 14% of senior loan officers said their banks had gotten less strict in the three months ended in October.
Of course, lenders are not expected to return to the lax underwriting standards of the boom years. Banks are much more careful these days, making sure that all mortgages are fully documented, said Palim.
They don’t want to look irresponsible, or worse, predatory. “They’re very concerned about reputational risk,” he said.