To prepare for a possible economic slowdown, Fannie and Freddie, which back most U.S. mortgages, won’t qualify some buyers with small down payments or deep debt.
WASHINGTON – Fannie Mae and Freddie Mac are pulling back on the number of mortgages they back, notably taking a second look at some mortgage applicants with small down payments or who are deeply indebted. The Federal Housing Finance Agency (FHFA) that oversee Fannie and Freddie says will help mortgage giants prepare for a possible economic downturn.
The FHFA has made getting Fannie and Freddie out from under government control a priority, and reducing risk could limit their defaults and boost profits – and that would make them more appealing to potential investors in the private market.
“Some of this really is a reflection of the increased emphasis and focus on: Let’s do what we need to do to get out of conservatorship,” FHFA Director Mark Calabria said in an interview.
Fannie and Freddie recently tightened requirements for backing mortgages to borrowers who are making minimum 3% down payments. Previously, borrowers whose income was as high as the area median could qualify for these Fannie- and Freddie-eligible loans. This summer, Fannie and Freddie said borrowers can’t have income of more than 80% of the median.
While banks and investors could pocket huge financial rewards if Fannie and Freddie return to private-sector ownership, critics say the changes could hinder Fannie’s and Freddie’s mission to make homeownership more accessible and affordable.
However, Calabria says “there’s a lot of evidence that we’re near the top of this cycle. It would be counter to their mission (if) we get borrowers into loan products that would leave them vulnerable in a downturn.”
Source: Wall Street Journal (12/10/19) Eisen, Ben
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