Amid News Of $475m In Q3 Losses, Freddie Mac CEO Urges More Low Down Payment Loans by Amanda Maher
The same day it was revealed that Freddie Mac sustained $475 million in losses in the third quarter, Freddie Mac CEO Donald Layton urged lenders to increase the number of low down payment loans they issue.
Layton called the Q3 losses “accounting noise” and said the bigger issue “is getting lenders to fully exploit the credit box” – i.e. taking advantage of new regulations that allow for 3% down payment mortgages that Fannie Mae and Freddie Mac have pledged to bundle and securitize.
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Mortgages with less than 3% down payments currently account for about 11% of the overall mortgage market, according to RealtyTrac. Lenders drastically scaled back the number of low down payment loan products they offered in the wake of the housing market crash of 2008-2010; some eliminated these programs altogether. Even as the market improves, lending to those with 3% down has remained flat.
As some have noted, however, other underwriting requirements remain in place that make it difficult to lend to those who would otherwise qualify for these low down payment loans, such as those with high but unsteady incomes or those who are unemployed. Lenders who would otherwise consider these riskier loans find their hands tied.
Layton responded to this criticism last week, when he told those at the Mortgage Bankers’ Association annual convention that more low down payment programs may be in the works. “There are still some nooks and crannies left in the mortgage market to fill,” he said.
Even with new programs, Layton ignores the fact that these lending practices are largely what led to the housing market meltdown just a few years ago. Low cost loans, coupled with today’s rock-bottom interest rates, are aimed at making it more affordable for lower-income and minority residents to purchase homes—despite having a credit profile that makes them more apt to default. (Advocates urging for the GSEs “recap and release” as a way to increase homeownership opportunities are also ignoring these facts.)
“Policymakers, lenders and buyers all assumed housing prices would always rise so homeowners could always refinance any money problems away,” writes Michael Barone for the New York Post. “Oops. Housing prices fell sharply in 2006, and financial firms ended up with mortgage-backed securities that regulators classified as safe but for which they suddenly could find no buyers – and the economy crashed.”
Sound familiar? Housing prices have rebounded – even soared, in some markets – to the point where it’s largely accepted that values are already overinflated. It’s no wonder, then, that banks remain hesitant to lend to un-credit-worthy buyers; no matter how strong Layton and others urge otherwise, lenders cannot ignore these realities. Doing so puts hundreds of thousands of Americans at risk of becoming underwater when the market corrects itself.
What’s more, because the GSEs remain in conservatorship with no end in sight, American taxpayers will pay the brunt of the costs if and when another downturn happens. With real estate cycles lasting an average of ten years, we should expect another downturn sooner rather than later. This is not the time for banks to issuing risky loans. Instead of encouraging banks to do so, Freddie Mac should turn its attention inward to address the root causes of its dramatic third quarter losses.