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Fannie and Freddie to Cut Down Payments for Some Homebuyers
Wednesday, December 10, 2014 6:30 AM

Yesterday, Fannie Mae said that starting Sept. 13, it will allow lower down payments for first-time homebuyers and permit refinancing borrowers to reduce equity to 3 percent to cover closing costs. Freddie Mac will begin a program in March giving breaks to lower-income buyers and first-time borrowers who get housing counseling.

“These underwriting guidelines provide a responsible approach to improving access to credit while ensuring safe and sound lending practices,” Melvin L. Watt, who oversees the two U.S.-owned companies as head of the Federal Housing Finance Agency, said in a statement.

Watt encouraged the move as part of a broader effort to spur lending to minorities, young adults, and first-time buyers. Lenders have tightened standards after paying tens of billions of dollars to settle lawsuits over mortgage-underwriting flaws.

Fannie Mae and Freddie Mac, which buy more than half of new home loans and package them into bonds, currently allow down payments as low as 5 percent. Fannie Mae accepted 3 percent down as recently as Nov. 2013, before increasing the requirement in a tightening of its underwriting standards.

The move to allow lower down payments has generated criticism from some Republicans and industry officials. Representative Jeb Hensarling of Texas, the chairman of the House Financial Services Committee, has faulted the idea as a return to the policies that caused the housing crash.

Officials of Fannie Mae and Freddie Mac said rules banning risky loan features will ensure that the new low-downpayment mortgages are safe. Only borrowers buying or refinancing a single-family primary residence will be eligible.

Fannie Mae will allow borrowers who haven’t owned a primary residence within the last three years to qualify. Freddie Mac’s program will be limited to people who’ve never owned a home, those with moderate incomes, or buyers in under-served areas.

Borrowers who currently have loans backed by either of the two companies will be allowed to refinance with as little as 3 percent down. Fannie Mae borrowers will be allowed to take cash out for closing costs; Freddie Mac borrowers will not.

Source:  Bloomberg News