One of the culprits in the building and bursting of the nation's housing bubble, the low-down-payment mortgage, is back in favor and readily available at a lender near you.
Numerous firms are taking part in a new and somewhat controversial program offered by Fannie Mae for fixed-rate conventional home loans with 3 percent down payments. Freddie Mac starts backing similar loans next month.
The two bailed-out housing finance corporations reintroduced their 3 percent down products in December as a way to assist prospective first-time home buyers who have the income to pay off a mortgage but lack the savings for a large upfront payment. Prior to the announcement, Fannie and Freddie's lowest down payment option was 5 percent.
Lenders say that millennial home buyers — those born after 1980 — can especially benefit from this new 3 percent down program.
"When the housing bust happened, all of these programs went away. So conventional loans with less than 20 percent down disappeared for a period of time," said Ken Turkington of mortgage brokerage First Commerce Financial. "Now that we have a sense of stability, they're coming back into play."
Alex Bienkowski, 24, could be a future candidate for a low-down-payment mortgage. He and his longtime girlfriend have full-time jobs and rent an apartment in a Detroit suburb. They've started saving toward a goal of $10,000 to $15,000 — enough for a down payment under one of the new programs.
"It seems like a pipe dream of sorts right now," Bienkowski said of home ownership.
Proponents contend that the 3 percent-down-mortgages are vastly different from the risky subprime mortgage products that fueled the housing bubble and led to the financial crisis. As a result of the crisis, the federal government infused Fannie and Freddie with $187 billion once borrowers started defaulting. (They've since repaid the bailout with a $38-billion profit.)
Adjustable rates or interest-only teaser periods are forbidden. Borrowers must accurately document their finances and ability to repay. And they also need a minimum 620 credit score, a low debt-to-income ratio and must take a home ownership education course.
"There's many factors that go into the risk of a certain loan and down payment is just one of them," said Fannie Mae spokesman Andrew Wilson. "You get into the danger zone when you're layering a lot of risk factors."
Still, some lawmakers have questioned whether the 3 percent-down products are a return to the loose lending practices that brought on the 2007-08 real estate market collapse.
That danger — real or exaggerated — was a hot topic among Republican members of the House Financial Services Committee during Jan. 27 testimony by Mel Watt, director of the Federal Housing Finance Agency that regulates Fannie and Freddie.
"You're once again putting people into homes that they can't afford," said Rep. Jeb Hensarling, R-Texas.
Fannie and Freddie were major buyers of nonprime mortgages and mortgage-backed securities in the years before the market crash.
Watt disputed the notion that the 3 percent-down-mortgages are risky. He said there are "compensating factors" for the low down payments, such as credit scores and requirements that borrowers buy private mortgage insurance if making less than a 20 percent down payment.
"We have no interest in going back to irresponsible lending," he said.
The new loans would seem to present minimal risk to mortgage lending firms like Quicken Loans. That's because Fannie and Freddie will buy up and guarantee all of the qualifying 3 percent-down-mortgages. And lenders aren't required to hold any part of the loans on their books. If a lender violates the guidelines, Fannie and Freddie can make it buy back the loan.
"Programs like this, that offer low-down-payment options, coupled with current interest rates near historic lows and great home affordability, have the potential to allow millions of well-qualified consumers to become homeowners," Quicken Loans spokesman Aaron Emerson said in an email.
Low-down-payment mortgages never completely went away after the crash. The Federal Housing Administration has continued to offer 3.5 percent-down-mortgages for certain first-time borrowers and the Department of Veterans Affairs and Department of Agriculture even run zero-percent-down-mortgage programs.
The Michigan State Housing Development Authority offers "MI First Home" and "MI Next Home" programs with up to $7,500 in down payment assistance.
Ryan and Lauren Edwards were thankful for a 3.5 percent down payment FHA loan last summer to buy a $112,000 ranch house with a finished basement.
Ryan Edwards, 30, said he worried about having to possibly save $20,000 or more for a down payment, and was relieved to learn of the FHA option through his lending agent at Michigan First Mortgage.
That 20 percent would be $27,600 on the $138,000 median sale price in December for a listed metro Detroit home, according to the Realcomp service.
"That was the biggest concern — the down payment — so it helped a lot," said Edwards, who works in auto sales.
Down payments of about 20 percent were the norm for most home mortgages prior to the 1980s. A large down payment helps assure lenders that a borrower has enough of a stake in the property to keep up with the monthly payments. Sizable down payments also make it less likely that borrowers will walk away if home values fall and they owe more on their mortgage than the property is worth.
Fannie and Freddie relaxed their down payment requirements during the 1990s, moving from 10 percent to 5 percent to 3 percent, and later even zero-percent down in the early 2000s.
The government's Financial Crisis Inquiry Report concluded that Fannie and Freddie "added helium to the housing balloon" by buying subprime mortgage-backed securities and loosening their standards for guaranteeing loans. But they weren't central causes of the crisis: "They followed rather than led Wall Street and other lenders in the rush for fool's gold."
After the crash, Fannie and Freddie were crucial to propping up the housing market when lenders were skittish to make loans without government guarantees. Together, both entities own or guarantee just under 60 percent of all new U.S. mortgages.
Research by the Urban Institute, a left-leaning think tank, shows that default rates on recent Fannie Mae-backed mortgages are similar among borrowers who make 20 percent down payments and 3 percent to 5 percent payments. However, defaults on older, pre-crash loans were much higher with low down payments.
"We've gone from the extreme where if you can fog a mirror you can get a loan to where people who have very strong qualifications, but only for the ability to save up enough money to put down a larger down payment are simply being excluded from ownership opportunities," said Paul Leonard, a senior vice president at the Center for Responsible Lending.
The center has argued that requiring down payments of 10 percent or higher will bar many middle-income families from owning homes and widen wealth disparities between whites and minorities.
"There are a lot of folks who are quick to suggest that any changes from today's historically tight credit standards will lead us down into the abyss," Leonard said. "But the reality is the world is a different place."
©2015 Detroit Free Press. Distributed by Tribune Content Agency
