“Down Payments Fall to 3%” says Fannie and Freddie

Not so fast…  This past week, Fannie and Freddie, the secondary mortgage market behemoths, announced lower down payment requirements as low as 3% of the appraised value of a home.  This is intended to “jump start” the housing industry.

Without getting to inside baseball, here is a quick background on where we are.  In January of this year,sweeping rules went into effect as a result of the Dodd Frank bill. Among several changes, the Qualified Mortgage mandate was implemented, and a 43% ceiling on  debt to income went into effect.  Predictably, these requirements chilled the housing recovery that was underway by making credit standards more strict, and scaring banks from risks.  In order for a borrower to get financing, they now must meet much more strict guidelines for “creditworthiness” and their ability to repay a loan.

In an attempt to kick the housing market out of its slumber and increase home ownership, Fannie Mae and Freddie Mac announced on Monday they will begin purchasing loans with down payments as low as 3%.  On the surface this sounds great!  I, for one am cautiously optimistic at best.

First, anything that allows borrowers to get mortgages with less “skin in the game” immediately makes me lean forward.   Little or no skin in the game was a major stimulant to the great recession and the housing bust.

Second, down payment is not the major burden buyers face.  FHA allows a 3.5% down payment, and VA allows 100% financing already.  So Tom… what IS the major problem?

Aside from ballooning student debt, anemic economy, flat wages, and underemployment, the major issue is the 43% Debt to Income ratio buyers are now held to.   By the time the buyer piles on mortgage insurance fees, HOA fees, hazard insurance, and taxes along with principle and interest payments to their monthly payments, the monthly payment devoted to housing has ballooned so high many buyers cannot get under the 43% imposed ceiling.

In my opinion, until the FHA reduces Mortgage Insurance Premiums, flood insurance is figured out, and the debt to income ratio is loosened up, buyers will be sitting on the fence no matter how low the down payments go.

At the very least, the big boys and girls are doing something to improve things, so Kudos to Fannie and Freddie!

Hat tip to http://absolutelymemorial.com for the photo