Getting a home loan is about to get easier. That’s because Fannie Mae and Freddie Mac, the two government-backed residential finance giants that backstop a majority of all home loans, have put new lending guidelines in place that should make it easier for borrowers to secure loans. Not only are the two agencies lowering downpayment requirements, but more importantly, they have clarified when lenders will be on the hook if borrowers default. In the past, Fannie and Freddie have been able to force lenders to buy back loans that have defaulted soon after it was issued, if any mistakes were made in the paperwork or if there was borrower fraud. Mel Watt, the head of the Federal Housing Finance Agency, acknowledged that the previous policy made it hard for lenders to understand exactly when Fannie Mae or Freddie Mac would require the banks to repurchase loans. Under the new rules, any loans with no missed payments for 36 consecutive months after they were first issued will be backed by Freddie or Fannie should they default. The agencies will also allow two missed payments in the first 36 months without forcing borrowers into foreclosure. And if private mortgage insurance, which is required for all low downpayment loans, is rescinded, say due to errors made in the underwriting process, lenders will not automatically be required to repurchase the loans. According to Lawrence Yun, chief economist for the National Association of Realtors, the buyback issue has been “the number one hindrance to residential lending lately. If it disappears, it would be a big boost to residential lending.” Freddie and Fannie have also said they will start backing 3% down loans. Borrowers can currently get 3.5% down loans from the FHA, although they require borrowers to pay expensive mortgage insurance premiums for the life of their loans. The new low down payment loans should help boost homebuying among low-income and first-time homebuyers, who have been conspicuously absent from the housing market over the past year. Lenders already seem to be loosening up a bit. Mark Palim, who oversees economic and strategic research at Fannie Mae, said average credit scores for approved loan applications have dropped slightly over the past few months and lenders are doling out loans with lower downpayments as well. Source: CNN/Money
Note: We expect to release more details about the Fannie Mae and Freddie Mac 3.0% down programs as they become available.