Mortgage guarantor giants Fannie Mae and Freddie Mac both recently announced their intent to once again begin purchasing mortgage loans at 97 percent loan-to-value (LTV) in the case of first-time homebuyers. The result in housing policy circles has been a lively debate surrounding the wisdom of featuring such loans in an effort to jump-start purchases by would-be first-time homebuyers. For the record, there is a simple and straightforward logic to the rationale supporting the reintroduction of 97 percent LTV mortgages at Fannie Mae and Freddie Mac. Statistics show that 97 percent LTV mortgages work, and work well.
Down Payment Affordability Has Become a Significant Obstacle to Homeownership
It is no secret that a decline in overall affordability has had a negative impact upon homeownership rates in recent years. The Federal Housing Finance Agency tells us as much in its July 2014 Brief 14-02, "First Time Homebuyer Share and House Price Growth."
"The tendency of the first-time homebuyer share to decline as house price growth increases is evident in the aggregate correlation nationwide, as well as in the correlations across most states and in most years between 1996 and 2013. This provides evidence for the second hypothesis that increasing house prices may price some would-be first-time homebuyers out of the market."
Growing difficulty in the ability to save money for a down payment has proven especially challenging for Millennials and low-to-moderate income borrowers. However, purchasing a home still proves a better bargain in the long run, given the skyrocketing cost of renting, particularly in the larger urban settings that growing numbers of Millennials increasingly favor.
The troubling calculus goes like this: Millennials and other first-time homebuyers increasingly gravitate toward cities and metropolitan centers. After all, this is where the high-paying jobs of the future tend to be found. This is also where the cost of renting tends to be the highest. Take Washington, D.C. as an example of a trend found in many cities throughout the country. Median household incomes run a robust $92,610, while Zillow's Washington, D.C. home value index totals $359,300 in 3Q2014. Of course, the typical first-time homebuyer would presumably make less than the area median, making a down payment in this market even more challenging. Washington, D.C. renters are spending an average of 27.1 percent of their monthly income on their rental costs alone (up from 16.2 percent historically), compared to the 18.1 percent that area homeowners spend on their mortgage. Add to the mix the attendant costs of living, as well as (in many instances) student loan debt, and it becomes easy to see how significant an obstacle a large down payment poses to many of today's first-time homebuyers.
97 Percent LTV Mortgages Show a History of Performance
Statistics show that when they are properly originated, 97 percent LTV mortgages, or mortgages featuring a 3 percent down payment perform just as well as mortgages with considerably higher down payments. The Urban Institute tells us that the 1999-2012 default rate for 90 to 95 percent LTV mortgages was 6.9 percent, or roughly seven in 100, while the default rate for 95 to 97 percent mortgages (between 3 and 5 percent down payment) during the same time period was 7.1 percent, or roughly seven in 100--just about the same. Additionally, as of January 2014, the Qualified Mortgage Rule with its Ability to Repay mandate has become the law of the land. This presumably means that any and every qualified loan purchased by Fannie Mae and Freddie Mac will have met basic criteria demonstrating an ability to repay on the part of the borrower--including those mortgages granted at 97 percent LTV.
It should be noted that these high-performing and affordable low down payment mortgage products are commonly used at the Federal Housing Administration (FHA), various state housing finance agencies, and, until the more recent political backlash in the wake of the foreclosure crisis, at Fannie Mae and Freddie Mac.
A 97 LTV Program Intended to Limit and Restrict Access is No Program At All
One of the purported policy goals of reinstating 97 percent LTV mortgage purchases at Fannie Mae and Freddie Mac is to help boost America's housing recovery through expanded access to credit, resulting in successful purchases by qualifying first-time homebuyers. As such, the 97 percent LTV mortgage must be made widely accessible to qualifying borrowers currently sidelined by prevailing market and regulatory conditions. Anything less than this is mere political posturing, a policy carrot dangling from a lengthy stick, intended to pacify those demanding increased access to credit for qualifying borrowers, while seldom being implemented.
The very prospect of 97 percent LTV mortgage guidelines crafted by the same government-sponsored enterprises (GSEs) intended to implement these programs presents something of an inherent conflict. Restrictive program policies designed to limit access to 97 percent LTV mortgages through arbitrarily heightened underwriting guidelines and seemingly opportunistic fees would defeat the public policy purpose of having such a program at all. The more likely result would be the continued detouring of former GSE 97 percent LTV mortgage business to the fully taxpayer guaranteed FHA alternative. This outcome would increase overall taxpayer risk exposure while allowing the GSEs to sidestep their charter mission of serving the underserved by way of a 97 percent LTV mortgage program that exists in name only.
Of course, there are any number of philosophical questions out there regarding the future of American homeownership to which there are no truly right or wrong answers. One's philosophical stance often provides the basis for their answers to such complex public policy questions, and perhaps rightfully so.
America's Homeowner Alliance has gone on record time and again in support of reducing the overall risk exposure of Fannie Mae and Freddie Mac as a public policy goal. The simple truth is that the 97 percent loan-to-value mortgage featuring the Qualified Mortgage "Ability to Repay" rule would presumably do just that, while also opening a path to responsible homeownership for scores of first-time homebuyers across America. First-time homebuyers should not and must not be held hostage in a political battle that has little if anything to do with their demonstrated personal financial responsibility and creditworthiness.
Qualifying would-be first-time homebuyers should have widespread access to the 97 percent LTV mortgage product at Fannie Mae and Freddie Mac with the prudent underwriting practices implied by the Qualified Mortgage Rule and its Ability to Repay provision. Affordable pricing free of punitive fees and seemingly arbitrary loan-level pricing adjustments, or LLPAs as they are more commonly known, is as important as the low down payment itself, if the program is to accomplish the intended outcome of helping the would-be first-time homebuyer. This program will reasonably expand access to credit while also reducing the risk exposure of the taxpaying public through the introduction of private-capital risk sharing on high-performing affordable mortgages. Anything less will continue to sideline scores of otherwise qualifying first-time homebuyers while allowing the housing market and American economy as a whole to continue to languish, and also adding to taxpayer risk by way of a dangerously overburdened FHA.