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Blog: Freddie expands low-downpayment options

Freddie Mac recently announced a moderate expansion of its low-downpayment program. It will not be an earth-shattering change for the mortgage market, but does signal that Freddie is committed to competing with Fannie Mae in the 3 percent downpayment space.

FreddiemacIt also is a sign of the times. High home prices are putting the squeeze on homebuyers, particularly first-time homebuyers challenged to save money for a downpayment. These programs, combined with downpayment assistance, are allowing would-be buyers to borrow up to almost the entire home value.

The low-downpayment programs offered by government-sponsored enterprises (GSEs) Fannie and Freddie also are taking away some of the business — the borrowers with the best credit scores —  from the Federal Housing Administration (FHA) program.

Freddie first announced in 2014 that it was rebooting a low-downpayment program and has an existing program in place. The news last week was that, effective July 29, Freddie was launching a new “HomeOne” mortgage, a 97 percent loan-to-value (LTV) program designed specifically for first-time homebuyers.

Unlike its other low-downpayment program for lower-income borrowers, Freddie’s new loan program “broadly serves borrowers without geographic or income restrictions,” Freddie’s release said.  

Freddie also will make some adjustments to its existing low-downpayment Home Possible mortgage “to sharpen its focus on low- and-moderate income homebuyers whom the products were intended to serve.”

It is difficult to gauge how well these conventional low-down programs have been doing. The GSEs don’t disclose the loan counts in their quarterly reports. Freddie provides no information in its quarterly report that sheds any light on the relative size of its existing program. As of Wednesday, a Freddie spokesperson also wasn’t able to provide any numbers.

In a conference call with reporters this week, Freddie's Chief Executive Officer Donald Layton said targets are modest. 

"As was true for the original product, there are only so many loans that have a quality credit despite high LTV," Layton said. "Our expectation of volumes is targeted and relatively modest, but it will go where it goes, as credit goes." 

Fannie Mae’s quarterly credit reports indicate that its high LTV programs have grown significantly as a percentage of its total single-family business. Loans with LTVs exceeding 95 percent comprised 4.7 percent of Fannie’s single-family loan acquisition volume in 2017, up from 2.4 percent in 2016.

The GSE low-downpayment programs have given loan officers another tool, said Joe Parsons, a senior loan advisor in the San Francisco Bay area at Pinnacle Capital Mortgage. He said conventional loans are typically a better option for borrowers with credit scores around 700. If they have lower credit scores, the FHA tends to be a better deal for the borrower.

“I am always looking at whether somebody is going to be better off with an FHA or conventional loan when they have got a smaller downpayment,” Parsons said. “And 100 percent of the time it is driven by credit score. If somebody has about a 700 credit score, that is kind of the break-even point when FHA and conventional wind up being essentially equivalent.” 


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