Fannie Mae to Drop Down Payment Rules in Worst Areas

By Jody Shenn
Bloomberg.com

Fannie Mae, the largest U.S. mortgage-finance provider, will stop requiring bigger down payments in regions where home prices are dropping, responding to criticism from consumer and industry groups who said the company is exacerbating the housing slump.

The policy, adopted in December, will end June 1, Washington-based Fannie Mae said this week in a statement. Potential homeowners approved by the company's automated computer program will be able to borrow up to 97 percent of the value of the property, the company said. Other loans will be accepted with loan-to-value ratios of up to 95 percent.

"We've been working on ways to meet the market's need to recover,'' Marianne Sullivan, Fannie Mae's senior vice president for single-family credit policy and risk management, said in a telephone interview.

Fannie Mae and McLean, Virginia-based Freddie Mac, the biggest sources of money for U.S. mortgages, had been tightening lending standard to limit losses, also introducing new fees on riskier loans and raising required credit scores. More than 80 housing advocates, mostly small-community groups, sent letters to Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac CEO Richard Syron last month asking for the policies to be withdrawn.

The government-chartered company said it can handle the changes, reported earlier by the Wall Street Journal, because it's changing the computer models it uses to assess whether it will accept specific loans.

Fannie Mae fell $1.21 to $29.02 at 10:17 a.m. in New York Stock Exchange composite trading, after dropping 24 percent this year. Freddie Mac declined 76 cents to $26.51. The stock is down 20 percent this year before today.

Borrow More

Fannie Mae reported a first-quarter loss of $2.19 billion May 6 amid rising homeowner defaults, and said that it will cut its dividend and raise $6 billion in capital as it grapples with the worst housing market since the Great Depression.

Home prices in 20 U.S. cities fell in February by the most on record, the Standard & Poor's/Case-Shiller home price index showed on April 29. The measure dropped 12.7 percent from the same month last year.

Fannie Mae tightened its policy on borrower equity in December as foreclosures soared to records. The adjustments required an additional 5 percent equity over the levels required on similar loans from borrowers with properties in areas such as parts of California, Nevada and Florida.

Discriminatory

The National Association of Home Builders and National Association of Realtors complained the companies' changes are deepening the housing crisis. Fannie Mae said May 6 that it would loosen some other guidelines, such as allowing refinancing of non-delinquent mortgages for as much as 120 percent of property values and agreeing to buy "jumbo'' mortgages for the same prices as smaller loans.

Housing advocates such as the Oak Park Regional Housing Center in suburban Chicago complained that by basing requirements for 5 percent larger down payments on the state of housing markets in certain zip codes, rather than broader metropolitan areas, Fannie Mae was in engaging a type of discrimination called redlining. The term refers to the illegal practice of banks denying loans and other services to certain areas, typically minority neighborhoods.

Need Insurance

Congress created Fannie Mae and Freddie Mac to increase mortgage financing and provide market stability. The companies, which own or guarantee more than 40 percent of the $12 trillion in U.S. residential mortgage debt, profit by holding mortgage assets that yield more than their debt costs, and from fees charged to guarantee bonds they create out of loans.

The U.S. Senate Banking Committee yesterday agreed on legislation that would overhaul regulation of Fannie Mae and Freddie Mac.

Borrowers will still need to find mortgage insurers that will accept the loans, said Brian Simon, senior vice president at Mount Laurel, New Jersey-based mortgage bank Freedom Mortgage Corp.

The companies are required by law to have borrowers who want to put less than 20 percent down obtain private mortgage insurance from companies such as MGIC Investment Corp. and PMI Group Inc., which have been tightening policies.

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