Allowing the government-sponsored enterprises (GSEs) to guarantee conventional mortgages with downpayments as low as 3 percent may not be as risky as it may appear.
Researchers at the Urban Institute
looked at recent low downpayment mortgages guaranteed by the GSEs and found that default rates for downpayments between 5 and 10 percent were similar to those between 3 and 5 percent.
The researchers looked at Fannie Mae loans issued before 2013 under a now-expired 3 percent down program. Loans originated in 2011 with a 3-5 percent downpayment defaulted at a rate of 0.4 percent, the same rate as loans originated with a 5-10 percent downpayment.
The default rate for 3-5 percent down loans originated in 2012 was 0.2 percent, and was 0.1 percent for the higher downpayment loans.
Those default rates, however, are for borrowers with credit scores above 700. Below that credit score threshold, the default rates increase, the researchers found.
In 2011, borrowers who put 3-5 percent down and had a sub-700 credit score defaulted at a rate of 0.7 percent — surprisingly, borrowers with similar credit scores who put down between 5 and 10 percent had a higher default rate at 1.4 percent. Of all borrowers with sub-700 credit scores, the
ones who put down the least had the lowest default rate.
There was a similar story in 2012. The 3-5 percent downpayment borrowers with sub-700 credit scores had a default rate of 0.3 percent compared to 0.5 percent for borrowers who put down 5-10 percent.
Those default rates, however, are leagues lower than in 2007. In that year, loans to borrowers even with the best credit scores who put up to 20 percent down were defaulting at rates between 11 and 20 percent.
The researchers found that repurchase rates for low downpayment loans was also relatively low — 0.5 percent for all such loans between 1999 and 2013, while the rate for 5-10 percent downpayment loans during that same period was 0.4 percent.
“This analysis tells us that there is likely to be minimal impact on default rates as low-downpayment GSE lending gravitates toward borrowers with otherwise strong credit profiles,” Urban Institute researchers Taz George, Laurie Goodman and Jun Zhu wrote.
“And this makes sense because GSE loans are priced on the basis of risk, while Federal Housing Authority [FHA] loans are not. Thus, borrowers with high [loan-to-value ratios] and low FICO scores will find it more economically favorable to obtain an FHA loan.”