As you know Fannie has announced its intention to offer a 97% LTV product (Fannie 3% down). Now some details are starting to trickle out.
Fannie is ready and believes they can handle it this time around, the Realtors are ready especially those representing minority home buyers, and some lenders seem ready. All say it will help the housing market grow by improving financing options for first time home buyers which in turn will allow more move up buyers; the new “trickle up” economy.
But there are quite a few moving parts to this process and they all need to come together for it to work. First, how will the loans be priced by Fannie to offset the risk. Next, what about the MI companies? Are they fully onboard and what will the premiums be for coverage at the higher LTV? Depending on Fannie LLPAs and the cost of MI will the new product still be affordable to first time and/or minority home buyers?
On top of that, lenders are still smarting from the recent repurchase and indemnifications demands from the Agencies that resulted from the defaults on loan programs previously introduced to spur financing for housing to these same segments, albeit in some cases abused by lenders.
Does Fannie have the systems, loss reserves and financial strength to handle any losses which may result from this decreased down payment lending (less skin in the game for the consumer) or will they come back to the lenders to carry the freight, or worse yet, lean on the taxpayers again. Has the housing market stabilized enough to support high LTV lending? Will buyers end up under water again in the event of a slight market downturn?
This is risky lending at its best. Low down payment to the most inexperienced buyers for entry level housing stock sounds like what FHA has been doing for years and look where it got them. They had to drastically increase their premiums to cover the losses and rebuild their reserves.
If we learned anything it’s that quality lending works. Although lending is down, so are defaults and foreclosures. Fannie and Freddie are turning a profit and banks seem to doing quite well.
I’m not saying that ways to increase home ownership opportunities are bad. I am saying that I sure hope we learned from our past mistakes and make changes very carefully and slowly, with an eye on quality and watch the potential adverse effects of stretching the envelope a little too far. If we make it too easy to buy a home, do we make too easy to walk away when things get tough?
Let’s do things right this time…