The Washington Post
Loans With Low Down Payments May Get Cheaper
By Kenneth R. Harney
September 15, 2001
Congressional housing leaders are on the verge of announcing a new concept in home mortgages that promises to cut interest rates and application costs for home buyers who can't afford a large down payment.
The plan, called Choice, would target borrowers who have purchase down payments of less than 20 percent. High on the list of intended beneficiaries are first-time buyers, consumers with high debt-to-income ratios, minorities and consumers with slight imperfections in their credit histories.
By broadening the base of capital market sources of money available to fund such buyers, the plan would try to generate greater competition -- and better terms -- on mortgages with low down payments.
Advocates of the Choice concept said some borrowers would slice up to 1.5 percentage points off their mortgage rates, as well as hundreds of dollars in loan fees. The technical details of the plan are complicated, but the basic idea is this: The conventional home mortgage market is dominated by the mega-investors Fannie Mae and Freddie Mac. Both were chartered by Congress to purchase mortgages originated by local lenders, thereby freeing up lenders' funds for new mortgages.
The Choice plan would add another powerful investor, Ginnie Mae, to compete on pricing and terms for mortgages with low down payments. Ginnie, formally the Government National Mortgage Association, is part of the Department of Housing and Urban Development, and currently buys only federally insured (FHA and VA) loans.
Under legislation drafted by Sen. Wayne Allard (R-Colo.), ranking minority member of the Senate housing subcommittee, and Rep. Marge Roukema (R-N.J.), chairwoman of the House housing subcommittee, Ginnie Mae would be allowed to buy low-down-payment, private-market mortgages. The bills are expected to be introduced as early as next week. Loans covered by the legislation could go as high as $275,000 under current rules, and allow down payments of less than 3 percent.
The entry of Ginnie Mae into the market would give lenders a new outlet for their low-down-payment mortgages and would virtually guarantee lower rates for some borrowers, say supporters. A new study by mortgage economists Ann B. Schnare and Susan E. Woodward finds that the savings to home buyers could be significant -- even turning applications rejected for regular interest rate pricing by Fannie or Freddie into loans funded at prevailing market rates by Ginnie.
According to Woodward, the Ginnie Mae plan could provide substantial savings to a low-down-payment borrower with slightly dinged credit. For example, an 8.5 percent mortgage at Freddie Mac could be as low as 7 percent at Ginnie under the Choice plan. Woodward and Schnare's study, funded by a group of private mortgage insurance companies, estimates that the federal budget would also benefit from Ginnie Mae's entry into marketplace competition. If Ginnie bought $30 billion a year of low-down-payment loans, the federal government would gain $219 million in revenue over the life of the mortgages.
Private mortgage insurers would be integral to the Choice program -- they would provide most of the insurance on the mortgages and protect Ginnie Mae from losses on defaults. The insurers would also gain substantial new business volume -- and profits -- along with the government. In fact, private insurers have been the key proponents of the Choice idea for more than a year, arguing that their electronic underwriting systems approve higher percentages of loan-worthy, low-down-payment applicants than do Fannie and Freddie's systems.
They cite a study this year of more than 150,000 loans that found Fannie and Freddie's composite "accept" rates on low-down-payment applications from home buyers with moderate FICO scores in the range of 620 to 660 to be just 61 percent, compared with 72 percent by private mortgage insurers' electronic systems.
FICO credit scores -- named after the creator of the system, Fair, Isaac & Co. -- range from the 300s to more than 850, with scores of 620 to 660 indicating an applicant with slight to moderate credit-history blemishes. The same study found Fannie and Freddie's composite "accept" rates on African American borrowers to be 65.8 percent, compared with 76 percent for the private insurers. Hispanic "accept" rates by the private systems was 77 percent, by Fannie and Freddie, 72 percent.
"Accept" decisions by the private insurers and Freddie and Fannie generally qualify the borrower for the standard interest rate and terms available at the time. Applicants not accepted either pay higher interest rates or are rejected.
Working through the new Ginnie Choice plan, private insurers say they want to compete for the low-down-payment loans they say are now priced too high by the two giant investors who dominate the market. Give us a shot to fund those loans, Choice advocates say, and thousands of borrowers will pay less.
Executives at Fannie and Freddie say they are "studying" the new proposal, and had no immediate comment on it.
© 2001 The Washington Post Company