Fannie Mae is scrapping a "declining markets" policy that required loan underwriters to boost minimum down-payment requirements by 5 percent in areas where home prices are falling or difficult to determine.

Beginning in June, Fannie Mae will instead require 3 percent down payments for conventional, conforming mortgages processed through its Desktop Underwriter automated underwriting system, and 5 percent minimum down payments for loans processed manually. Larger down payments may be required depending on occupancy, property and transaction types.

The new single national down-payment policy will retire a controversial declining-market policy announced in December. The policy, implemented Jan. 15, boosted the minimum down payment required by 5 percent when Desktop Underwriter flagged a property as being located in an area of declining home prices or where it was difficult to assess home values. The policy also applied if an appraiser determined a property was in a declining market.

In an April 11 letter, the National Association of Realtors complained to Fannie Mae that "entire metropolitan statistical areas (MSAs) have been tagged as declining markets regardless of the actual values in the local neighborhoods, which further discourages potential buyers from entering the market."

The policy kept some would-be home buyers from taking action because they could not come up with the funds to make the increased down payment. Others avoided buying because they were afraid to do so if prices were still declining.

"In either case, the impact of the policy becomes a self-fulfilling prophecy that creates declining markets that did not exist before and intensifies the decline for markets that are declining and delays their recovery," NAR President Richard Gaylord said in a letter to Fannie Mae Chief Executive Officer Daniel Mudd.

Fannie Mae says it’s able to move away from the declining markets policy because the latest version of Desktop Underwriter — Version 7.0 — will limit risk layering and assess each loan more precisely.

"At the same time, we believe that equity matters, especially in this market," Marianne Sullivan, Fannie Mae’s senior vice president of single-family credit policy and risk management, said in a statement. "Down payments are a critical success factor in home ownership — and responsible lending is good business."

Private mortgage insurers who insure most loans purchased by Fannie Mae and Freddie Mac in cases where borrowers put down less than 20 percent have their own requirements, including 3 percent minimums and stricter standards in declining markets (see story).

Fannie Mae’s new national down-payment policy is part of the company’s "Keys to Recovery" initiative announced May 6, which also includes improved pricing for jumbo-conforming mortgages to help borrowers in high-cost areas.

Through the end of the year, Fannie Mae announced this month that it will buy the new jumbo-conforming loans — up to $729,750 in high-cost areas — at the same price as loans that meet the conventional conforming loan limit of $417,000.

Congress gave the government-sponsored enterprises the ability to purchase mortgages larger than the conventional conforming loan limit of $417,000 in the hopes of bringing down interest rates on jumbo loans.

But until recently, the "spread" between conventional conforming loans and jumbo loans had remained pronounced — about 1 percent — and lawmakers have expressed disappointment about the pricing of jumbo conforming loans.

Although rates on jumbo conforming loans have come down, the House Financial Services Committee will hold a hearing on May 22 to examine the steps taken to implement the new loans and the impact on home buyers and the housing market.


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