The two biggest powers that be in the residential housing industry, Fannie Mae and Freddie Mac, announced detailed plans last week to bring back the 3% down program provided at-least one of the applicants is a 1st time home buyer. This 3% down mortgage was available as recent as last year, but had heavy restrictions, making it mostly in-effective. Unfortunately, this does not apply for investment property or second homes.
In a nutshell, it’s an attempt to provide a viable secondary source of financing alongside the FHA program that has long allowed a 3.5% down payment. The difference between this and FHA is primarily the cost of the mortgage insurance (MI). FHA charges 1.75% up-front and then 1.250% annually for the MI and the conventional program here will not require any up-front costs and the annual MI premium should be less than 1.250%. Compared to FHA, it will also require higher Fico scores and a more sensitive to credit history.
Although this program may not end up being a huge lift to the market, it is a promising step in the right direction. Without a doubt there needs to be more products and options available, especially to 1st time home-buyers. However, the program is stirring up some controversy in regards to whether this is the same exact thing that lead to the real estate crash in recent years.
Jeb Hensarling, chairman of the House Financial Services Committee, said in a November statement, Watt’s plan is a return to the policies that caused the housing crash and is an invitation by government for industry to return to slipshod and dangerous practices that caused the mortgage meltdown in the first place and wrecked our economy.” Read the Bloomberg article here “Fannie-Freddie Regulator’s 3% Down Loans Draw Jeers”
While this comment from the congressman makes for a good headline, it is absolutely not the case. As a veteran in this industry and a top originator of loans during the height of the market and now, I am confident that the causes were a combination of things and most of it had to do with poor underwriting and rampant fraud. Because the underwriting is still so thorough and stringent (almost to a fault) I cannot imagine the default rates on these 3% mortgages will be any higher than anticipated and keep in mind, that is exactly what the mortgage insurance premium will cover.
About the Author ~ Since 2003, Beau has been a mortgage professional and is a leading mortgage professional in San Diego. As Founder and Senior Mortgage Advisor at Transparent Mortgage he is truly committed to serving the needs of his clients and raising the industry standards for integrity and transparency.
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