Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) officially announced new programs allowing mortgages with just a 3% down payment. Both GSEs say that as long as other underwriting standards are still in place, and the total volume of loans is relatively small, the low down payment loans don’t add too much risk to their businesses.

“To mitigate risk, Fannie Mae and Freddie Mac will use their automated underwriting systems, which include compensating factors to evaluate a borrower’s creditworthiness.  In addition, the new offerings will also include homeownership counseling, which improves borrower performance.  FHFA will monitor the ongoing performance of these loans,” said Federal Housing Finance Agency director Mel Watt.

Minor difference between Fannie Mae, Freddie Mac programs

The Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) announcement explains that the 97% loan-to-value (LTV) mortgages will still have to meet all of its other eligibility requirement including underwriting, income documentation, and (like all loans with LTV above 80%) some form of risk sharing such as private mortgage insurance. At least one of the co-borrowers has to be a first-time homebuyer, although some homeowners with a Fannie Mae-owned mortgage will be able to refinance their existing mortgages under the new rules on a limited cash-out basis.

The and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) program is similar, although it isn’t limited to first-time homebuyers (who have to take part in a borrower education program to qualify for the program). Also, Freddie Mac is only allowing refinancing under the program on a no-cash-out basis. Freddie Mac estimates that borrowers should expect to pay between $40 and $80 per month for every $100,000 that they have borrowed until they have built up 20% equity in the home, at which point they can cancel their PMI.

Responsible lending v. access to credit

The two programs are aimed at expanding access to home loans, but some critics worry that this is a return to the loose lending standards that led up to the US housing crisis. In general, there is a trade-off between the goals of reducing risk and expanding access to credit, and it’s not always clear where the right balance is. This is a far way off from where the country was in 2005 (with liar loans, risk layering, and all the rest of it), but without some clear Congressional action on the future of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), it’s up to Watt to determine where the GSEs draw the line.

Fannie Mae, Freddie Mac Officially Announce 3% Down Payments