Fannie Mae OKs less down for homes
Posted on Saturday, May 17, 2008
Fannie Mae, responding to pressure from homeowner and real estate groups, will allow buyers in markets with falling home prices to purchase houses with 3 percent down payments, potentially increasing the company’s risk.
The largest U. S. mortgagefinance provider fell as much as 4. 5 percent Friday as the announcement, combined with new legislation that may require Fannie Mae and Freddie Mac to finance a government mortgage program, demonstrated the extent of lawmakers’ sway over their policies.
“It basically shows you that they have a public purpose mission that doesn’t always help the shareholders,” said Moshe Orenbuch, an analyst at Credit Suisse in New York, who has an “underperform” rating on shares of Fannie Mae and Freddie Mac. “All things being equal, lowering down payments in areas that have experienced declines in home prices has got to be more risky. And paying into the affordable housing fund reduces earnings.” The government-chartered Fannie Mae and Freddie Mac were created by Congress to increase mortgage financing and provide market stability. Lawmakers are seeking to tighten their grip on the companies. The Senate Banking Committee tentatively agreed Thursday on an anti-foreclosure measure that would have Fannie Mae and Freddie Mac foot part of the bill for a federal program to insure mortgages for struggling borrowers.
The stricter down payment policy, adopted in December, will end June 1, Washingtonbased Fannie Mae reported Friday in a statement. Potential homeowners approved by the company’s automated computer program will be able to borrow up to 97 percent of the value of the property, the company stated. Other loans will be accepted with loan-to-value ratios of up to 95 percent. Previously, borrowers in areas such as parts of California, Nevada and Florida were required to put down 5 percent more equity than borrowers elsewhere.
“We’ve been working on ways to meet the market’s need to recover,” Marianne Sullivan, Fannie Mae’s senior vice president for single-family credit policy and risk management, said in a telephone interview.
Fannie Mae is eliminating financing of up to 100 percent in other areas, ending programs that targeted first-time buyers.
Fannie Mae fell 34 cents to close Friday at $ 29. 89 in New York Stock Exchange composite trading, after dropping as much as 4. 5 percent. The stock has dropped 24 percent this year. Freddie Mac fell 30 cents to close at $ 26. 97. The stock is down 20 percent this year.
Fannie Mae and McLean, Va.-based Freddie Mac, the biggest sources of money for U. S. mortgages, tightened lending standards to limit losses, introduced new fees on riskier loans and raised required credit scores.
More than 80 housing advocates, mostly small community groups, sent letters to Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac CEO Richard Syron last month asking for the policies to be withdrawn.
The companies, which own or guarantee more than 40 percent of the $ 12 trillion in U. S. residential mortgage debt, profit by holding mortgage assets that yield more than their debt costs, and from fees charged to guarantee bonds they create.
“We’re obviously very pleased that they considered the community input on this,” said John Taylor, CEO of the National Community Reinvestment Coalition in Washington. “Hopefully, the direction that they’ve set is one that the industry is going to follow.” Borrowers in declining markets may still find it hard to obtain loans with low down payments because they will need to find mortgage insurers to accept them, said Brian Simon, senior vice president at Mount Laurel, N. J.-based mortgage bank Freedom Mortgage Corp.
Fannie Mae and Freddie Mac are required by law to have borrowers who want to put less than 20 percent down obtain mortgage insurance from companies such as MGIC Investment Corp., Radian Group Inc. and PMI Group Inc., which have been tightening their policies.
Milwaukee-based MGIC, the largest mortgage insurer, has implemented policies that restrict loan-to-value ratios in bad markets to 95 percent for borrowers with credit scores of at least 680, and to 90 percent from borrowers with scores between 620 and 680, spokesman Katie Monfre said.
In March, it stopped insuring loans with nothing down, raising its minimum to 3 percent. Monfre declined to comment on Fannie Mae’s changes.
“Our declining markets’ policy maxes out at 95 percent,” Rick Gillespie, a spokesman for Philadelphia-based Radian, said. “I don’t think we’re planning on making any changes to that at this time.” PMI spokesman Nate Purpura declined to comment on the Fannie Mae decision, except to say the company limits loanto-value ratios to 90 percent in declining markets.
Earlier this month, Fannie Mae reported a first-quarter loss of $ 2. 19 billion amid rising homeowner defaults, cut its dividend and raised $ 6 billion in capital.
Home prices in 20 U. S. cities fell in February by the most on record, the Standard & Poor’s / Case-Shiller home price index showed on April 29. The measure dropped 12. 7 percent from the same month last year. Information for this article was contributed by Dawn Kopecki and Cecile Gutscher of Bloomberg News.
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