There was a blog posted in The Washington Post yesterday afternoon that indicated that researchers from the Urban Institute have been reviewing the performance of low downpayment loans that have been backed by Fannie Mae in the past. Those researchers found, "that the default rate for loans with 3 percent to 5 percent down were very similar to the default rates on loans with 5 percent to 10 percent down". They also found that very few people took advantage of the 3% downpayment programs previously offered by Fannie and Freddie. Most people who took advantage of the programs as previously in effect had very high credit scores. The team of researchers concluded that to reinstate the programs would be "no big deal".
The blog went on to point out that if the programs were reinstated and the default rate were to 
increase tremendously beyond that which was historically determined, that the taxpayers would not be the ones to suffer and foot the bill as the loans that Fannie and Freddie are involved in with downpayments of less than 20% are insured against default by private mortgage insurance. The blog then pointed out that this situation is unlike the FHA low downpayment program that allows a downpayment of as little as 3.5%. On those loans that are insured by FHA, if there is a default, the taxpayers must pick up the entire tab as the entire loan is insured by FHA, an agency under the Department of Housing and Urban Development. In short that means that the federal government picks up the tab as I am sure we are all well aware.
Fannie indicated in an earnings call yesterday that these loans perform well and that Fannie has no problem in accepting these loans. While Fannie does not currently accept 3% downpayment loans from the public in general, Fannie does accept loans of this typoe that are issued currently through state and local housing authorities. They are not seen as being a return to "lax lending".
The issue seems to be whether banks and other lenders will offer these low downpayment mortgages. They may be concerned that they will end up buying the loans back as they had to do with subprime loans and other types of loans that carried a greater risk of default. The problem will not be with Fannie and Freddie in not accepting these loans, but the problem will be with lenders who do not want the possibility hanging over there heads that they might have to buy back the loans if the implode.
The loans are being considered as a way of boosting the housing market and providing an opportunity for more people to get in, or get back into, home ownership. Apparently Fannie and Freddie are working on the details of a program designed to allow investment in these low downpayment loans.
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