Fueling a New Bubble

So, Fannie Mae and Freddie Mac, the beleaguered government sponsored agencies, which were seized by the US government during the financial crisis, recently announced programs to back loans to low and moderate income borrowers who would only be required to put down three percent, a two percent reduction in what Fannie and Freddie have required.  Fannie Mae argues that the primary barriers to homeownership for first time home buyers is saving money for down payments and closing costs, and it wants to change that.

Fannie Mae and Freddie Mac certainly had their role in the last housing market run-up and the attendant crash, such that the taxpayers were forced to pump over $187 billion to prop them up (all of which has been paid back and more).  Not surprisingly, they are  targets of much criticism after announcing these new plans to broaden home ownership, which many feel will lead to another housing bubble.

Freddie Mac’s program is called “Home Possible Advantage”, and will be open to anyone who meets certain requirements, but first-time home buyers must participate in a home ownership education and counseling program. All participants will have to pay for private mortgage insurance.  Homeowners with Freddie Mac mortgages could also refinance under the program, but would not be able to take any cash out as part of the process.

Fannie Mae’s program will be available to anyone who has not owned a primary residence for the past three years. Private mortgage insurance will be required, and at least one borrower must complete an acceptable pre-purchase home buyer education and counseling program.  Borrowers with Fannie Mae mortgages will be able to refinance and can take out up to $2,000 to cover closing costs, but will not be allowed to remove equity from their home.  Fannie Mae will also require that at least one of the borrowers is a first-time home buyer.  Fannie Mae will also allow for the down payment to paid by a gift from someone else.

While both programs require mortgage insurance, unlike and FHA loan, the borrower can drop the insurance without having to re-finance, as the mortgage insurance will drop off as soon as the borrower can prove the value of the property has risen below 80% loan to value.  The loans would be allowed only for fixed-rate mortgages on single-family homes that would be the borrower’s primary residence and would require full documentation of the ability to repay the mortgage.

With more substantial safeguards in place for these loans, this may prove a boon to a sluggard housing recovery.  Either way though, Freddie and Fannie will continue to be ceaseless targets of criticism, as they have been for years.  We shall see how these programs play out.

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