Fannie, Freddie Programs Fly in Face of Foreclosures

The Washington Post
Monday, June 9, 2008

Despite the bursting of the housing bubble, it’s still possible to buy homes with no money down. In fact, it’s possible to borrow up to 105 percent of the purchase price, leaving the buyer with more debt than the house is worth.

It might sound like a pitch from a late-night infomercial. But the offer comes from Freddie Mac and Fannie Mae, two government-chartered companies with potentially conflicting mandates to uphold prudent lending standards and make homeownership more attainable.

Freddie Mac says its “HomePossible” mortgages can help buyers with limited credit or savings, including teachers, firefighters and members of the military.

But, as a wave of foreclosures shows, stretching too far to buy a home can end badly.

“Consumers should go into these things with their eyes open,” said Allen Fishbein, director of housing and credit policy at Consumer Federation of America.

Without equity in their property, buyers could end up unable to refinance at lower rates or sell their homes if they need to move.

Although borrowers are sometimes required to show they have money in the bank to draw upon in a crunch, Freddie Mac said people can qualify for its no-money-down purchases with no cash reserves. However, borrowers must undergo homeownership education. Such programs can reduce delinquency rates by about 34 percent, the company said.

Freddie Mac allows home buyers to borrow more than the purchase price if they use a second loan, sometimes called a piggyback, from special lenders such as government housing agencies, nonprofit groups and employers.

Fannie Mae typically applies a similar requirement when home buyers borrow more than 97 percent of the price. The lender on the second loan may forgive that debt if the buyer stays in the home for five years, said Gwen Muse-Evans, Fannie Mae vice president of credit policy and controls.

The loans have performed well, she said.

Neither company provided delinquency rates for borrowers who put no money down.

Fannie Mae, based in the District, and Freddie Mac, based in McLean, don’t issue mortgages directly to borrowers. Rather, they funnel money to lenders by packaging mortgages into securities for sale to investors and by buying mortgages for their own investment portfolios. By setting conditions for the loans they will take on, they help shape the options available to consumers.

Both companies are required to devote certain percentages of their funding to what the government defines as affordable housing. Depending on the recipient, no-money-down or low-down-payment loans can help the companies meet those quotas.

One reason buyers borrow more than the purchase price is to cover transaction costs.

Fannie Mae’s Muse-Evans said many buyers want to stay in their homes for five years or longer, and Fannie Mae expects the housing market to stabilize by then.

In the meantime, Fannie Mae and Freddie Mac have been predicting further price declines. Those drops could put borrowers who make no down payments even deeper under water and wipe out the equity of borrowers who put some money down.

Freddie Mac chief executive Richard F. Syron said last month that nationally, average home prices have fallen 9 percent from their peak, and Freddie Mac expects them to fall at least 15 percent.

How many no-money-down purchases are taking place these days isn’t clear.

“We see them pretty frequently,” said Steven Tuminaro, director of public policy and legislative affairs for NeighborWorks America, a nonprofit group created by Congress.

Judy Kennedy, president of the National Association of Affordable Housing Lenders, canvassed some members of her group and said they were seeking minimum down payments of 2.5 or 3 percent because they were afraid of the borrower becoming “a victim of the declining values.”

The volume of loans with no down payments can be affected by the availability of mortgage insurance policies used to protect Fannie Mae and Freddie Mac from losses if the borrower defaults. The meltdown in the housing market has put mortgage insurers under greater stress and prompted them to tighten standards.

“I don’t have specific numbers, but . . . it’s just intuitive that a lot of the activity has fallen off in light of what’s going on” with the mortgage insurers, said Freddie Mac spokesman Brad German.

Kennedy said responsible loans can be made with no money down when borrowers have expert support from nonprofit groups. If borrowers get in trouble, some of those groups will help them make their payments, Kennedy said.

Fannie Mae mentioned the continued availability of 105 percent financing last month in a news release announcing that it was abandoning a policy that required extra down payments in markets where home prices were declining. The company’s new policy allows buyers to borrow up to 97 percent of the purchase price with conventional mortgages.

Even as it eased the requirement, Fannie Mae said in the news release that down payments “are a critical success factor in homeownership.”