Is Fannie-Freddie's 3% Plan A Right Step Or Chronic Error?

Last month, Federal National Mortgage Association FNMA and Federal Home Loan Mortgage Corporation FMCC offered the homeowners of foreclosed properties a chance to buy back their homes back at lower prices. Now, the two housing mortgage giants plan to tempt the first-time as well as low-income home buyers with the offer of reduced down payments.

New Scheme

The Federal Housing Finance Agency (FHFA), regulator of Fannie Mae and Freddie Mac, has been making several policy changes to encourage more lending and accelerate the housing market recovery. This time it has focused on the millions of Americans who have been badly hit by the financial crisis of 2008.

Numerous people lost their savings and investments during the economic downturn and were robbed of the chance to have their own homes. The slow after-recovery from the crisis left them struggling and trapped in the low-income zone.

The FHFA wants to provide such people the opportunity to fulfill their wish by lowering the down payment rate to around 3% of the property value from the current rate of 5%.

Loans under the new scheme will be fixed-rate loans on single-family homes with a maturity of up to 30 years and will be extended to refinanced mortgages as well. Fannie Mae is expected to offer the new loans before the current year-end, while Freddie Mac plans to provide the same from early March next year.

Implications

Though the latest move by the housing finance firms can be reckoned as a golden opportunity for people belonging to the low-income group who want their own homes, it can also be criticized for being a self-damaging step if the borrowers who avail such scheme default later on.

Excessive mortgage defaults had impacted Fannie Mae and Freddie Mac severely during the crisis and the FHFA had stepped in to keep the firms afloat. However, to validate the effectiveness of this new plan, the FHFA launched stricter lending standards to keep the default rate under control and minimize the probability of recurrence of the previous unfortunate events.

The borrowers receiving mortgages under the new plan will have to prove their creditworthiness by undergoing comprehensive financial counseling. Moreover, the first-time purchasers would be required to pay for mortgage insurance. Through these measures, the housing mortgage firms intend to keep track of their elevated risk.

Our Take

The FHFA's efforts for facilitating mortgages to qualified borrowers and stabilizing the entire housing market are appreciable. However, with consistent relaxations in various policies, there also lies a risk in the form of strained financials of the mortgage agencies in case of exploitation of such revised guidelines.

Both Fannie Mae and Freddie Mac currently carry a Zacks Rank #3 (Hold). Two better-ranked stocks in the mortgage investment industry include Essent Group Ltd. ESNT and Walker & Dunlop, Inc. WD. Both these stocks sport a Zacks Rank #1 (Strong Buy).


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
FREDDIE MAC FMCC: Get Free Report
 
FANNIE MAE FNMA: Get Free Report
 
WALKER & DUNLOP WD: Free Stock Analysis Report
 
ESSENT GROUP ESNT: Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
Market News and Data brought to you by Benzinga APIs
Comments
Loading...
Posted In: Trading Ideas
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!