Fannie Mae and Freddie Mac on Monday announced details of a controversial plan to allow some first-time homeowners to obtain a mortgage while putting down just 3% of the price of the home.
We’ve not finished recovering from the Panic of 2008, and these entities want to resume an underlying component of the last housing bubble and burst that contributed so heavily to that.
Fannie Mae said the loans that allow for 3% down payments will be held to the same eligibility requirements as other Fannie loans, including underwriting, income documentation and risk management standards.
That’s a low bar, indeed, as it was during the last bubble.
The problem here is not so much the high leverage of those loans, per se, as it is the lack of skin in the game—the lack of equity, or actual ownership, or what is there for the borrower to lose—a 97% borrower has in the home he’s buying. What does he lose when can’t—or decides he doesn’t want to anymore—continue paying down his loan?
Here’s Andrew Bon Salle, Fannie Mae Executive Vice President for Single Family Underwriting, Pricing and Capital Markets (you can tell he’s important to Fannie Mae from the length of his title):
This option alone will not solve all the challenges around access to credit. Our new 97% LTV [loan to value] offering is simply one way we are working to remove barriers for credit-worthy borrowers to get a mortgage[.]
Which, of course, is only loosely related to reality: if the borrower were credit-worthy, he would have the scratch to put down 10%.
The argument seems to be, also, that it’s too hard for a homeowner wannabe to raise 10% of the house’s purchase price. This, too, is nonsense. The homeowner just needs to save longer and with more diligence. Or look to buying a less expensive house. Or both.
Judgment like this demonstrates the need for these two agencies to disappear and to let the market determine the viability of mortgage packaging and peddling.