Déjà vu – Low Down Payment, Low Credit Score, Cash-Out Mortgages Return

FNMA and FHLMC announced last week that they are reinstating low down payment loans with payment as low as 3% of the loan amount. Fannie Mae went a step further by stating that they will be accepting applications with FICO scores as low as 620 and limited cash-out refinances. FHLMC is not offering cash-out refinances like FNMA.

Those who attended the Mortgage Banker’s National Conference in Las Vegas in October this year will recall FHFA Director Mel Watt’s speech where he stated:

To increase access for creditworthy but lower-wealth borrowers, FHFA is also working with the Enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent.  Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account “compensating factors.”

The announcements by FNMA and FHLMC are in line with Director Watt’s October commitment.

The relaxing of lending standards seems like a déjà vu of the pre financial crisis days. One point it proves beyond doubt is that the return to normalcy of the housing market is strongly correlated to new homeownership. The question that also comes to mind is whether the targets of these new loan standards, the Millennial Generation Y buyers, have fundamentally changed their opinion about home ownership in general. Could it be that the low new homeownership rates we were experiencing was a result of this cultural shift and not because of high down-payment requirements? These Millennials experienced the full brunt of the decline of housing prices just prior to entering the market and are justifiably apprehensive on whether the timing or logic to own their own house is right or not. Q1 2015 will reveal whether these relaxation of loan standards  can achieve their intended purpose of attracting new homeowners back into the market. If new homeowners do  join back in droves we will then wonder if this was the right decision that precipitates another future housing bubble. Only time will tell the full story.

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