Finally, Good Things are Happening in 2015
There’s finally some good news this week! It looks like Fannie Mae and Freddie Mac are finally (somewhat) back on their feet and it appears the federal government would like to increase the number of Americans who are homeowners. The home ownership rate in the U.S. is presently in the mid 50% range, while the federal government has historically wanted it to be in the mid 60% range. In response, the federal government has decided to increase their purchases of single-family home loans (via Fannie Mae and Freddie Mac) to lower-income families.
Melvin L. Watt Director, Federal Housing Finance Agency (FHFA) said before the U.S. House of Representatives Committee on Financial Services on January 27, 2015, “Fannie Mae and Freddie Mac’s housing goals (are) to encourage responsible lending that is done in a safe and sound manner and that also serves the single-family and rental housing needs of lower-income families.” The program is designed for first-time homebuyers and requires borrowers to be owner-occupants.
Mr. Watt outlined five ways to accomplish these goals:
(1) The purchase guidelines for these loans (will) include compensating factors and risk mitigants to evaluate a borrower’s creditworthiness. These include housing counseling, stronger credit histories, and lower debt-to-income ratios. Mr. Watt also mentioned that Fannie Mae’s single-family home loan purchases through the third quarter of 2014 had a weighted average FICO score of 743 and a weighted average loan-to-value (LTV) ratio of 77 percent. Accordingly, Freddie Mac’s single-family home purchases through the third quarter of 2014 had a weighted average FICO score of 744 and a weighted average loan-to-value (LTV) ratio of 77 percent.
Most importantly, however, was a statement buried deep within Mr. Watt’s presentation, “. . . assessing the reliability of and the operational feasibility of using alternate or updated credit score models.” This may be an attempt to raise consumer FICO scores and may bode well for the single-family housing market. There have been rumors that medical bills may be removed from the FICO score calculation. This could place a large number of owner-occupied homebuyers in the position the buy a single-family home.
(2) These loans must have full documentation and cannot include 40-year or interest-only terms.
(3) Three percent down payment loans. On December 8, 2014, Fannie Mae and Freddie Mac announced purchase guidelines that enable creditworthy borrowers who meet stringent criteria and can afford a mortgage, but lack the resources to pay a substantial down payment plus closing costs, to get a mortgage with a three percent down payment. The loan must be a fixed rate and cannot be adjustable. These purchase guidelines will provide an important – but targeted – access to credit opportunity for creditworthy individuals and families.
(4) The products will leverage the existing automated underwriting systems.
(5) Private Mortgage Insurance. “Like other loans with down payments below 20 percent, these loans require private capital credit enhancement, such as private mortgage insurance. When a borrower makes a down payment of less than 20 percent, these mortgages are required by statute to have a credit enhancement – private capital standing behind the loan – in order to qualify for purchase by the Enterprises (Fannie Mae and Freddie Mac). Private mortgage insurance has always played an important role in meeting this requirement and it is critical to make sure that private mortgage insurers are able to cover claims both in good times and in bad times.
Mr. Watt also stated, “The Chicago FHLBank expects, at least initially, that loans sold would be “jumbo conforming” loans capped at $729,750 for a single unit in the contiguous United States.”
Mr. Watt has been considered an aggressive proponent of increasing the number of Americans who able to own their own home, so the single-family lending and brokerage businesses are looking up for 2015.