A big part of the AHA's stated mission of "...protecting and promoting sustainable homeownership for all segments of America" involves highlighting those policy changes that could be put in place literally overnight to help make homeownership stronger tomorrow. One such policy change would be the return of the 97% loan-to-value (LTV) mortgage at Fannie Mae and Freddie Mac.
New Fannie Mae purchases of 97% LTV mortgages were phased out effective November 1, 2013. Freddie Mac ended purchases of 97% LTV mortgages in 2011. The end of 97% LTV purchases at both Fannie Mae and Freddie Mac coupled with the scaling back of their maximum loan-to-value percentage to 95% has the practical effect of mandating a minimum 5% downpayment requirement for all mortgages eligible to be purchased by either institution.
In an environment where access to credit is tightening, the homebuyer's cost of credit is rising, and the country's collective economy is still sluggish, the end of 97% LTV mortgage purchases at Fannie Mae and Freddie Mac is absolutely the wrong policy decision at precisely the wrong moment in time. Here's why:
Mortgages with 3% Downpayment Perform Much the Same as Those with 5% Downpayment
If the intended rationale for ending Fannie and Freddie's purchase of 97% LTV mortgages is to reduce exposure to default risk, an alternative course of action might be in order. Available data suggests that a respective loan's potential for default is predicated upon a host of various risk characteristics aside from, and in addition to the proportionate size of the downpayment. The Urban Institute tells us that the 1999-2012 default rate for 90% to 95% LTV mortgages was 6.9%, or roughly 7 in 100, while the default rate for 95% to 97% mortgages (between 3 and 5% downpayment) during the same time period was 7.1%, or roughly 7 in 100 - just about the same. In fact, credit scores prove to be better overall predictors of default risk for mortgages featuring LTV ratios higher than 80%.
Average Credit Scores and Mortgage Costs Climb While Homeownership Rates Stall
So let's consider the average credit score of a Fannie Mae purchased loan. The weighted average credit score of a Fannie Mae purchased single family loan is 741 as of the first quarter of 2014 - well above the 2014 median credit score of 723. The conclusion one might draw from this comparison is that Fannie Mae's default risk exposure is relatively low no matter which metric we choose to consider, LTV ratio or credit score alike. When the credit score of the average Fannie Mae purchased loan exceeds the national median of 723 by almost 20 points, while besting the national average of 711 by more than 30 points, we just might have a serious policy problem on our hands.
As New Mortgage Activity Slows, So Does America's Economy - Coincidence?
Finally, the AHA has not been shy in highlighting the often overlooked link between homeownership, a reasonably healthy residential housing marketplace, and the overall strength of America's economy. Last month the Mortgage Bankers Association reduced their annual mortgage origination estimate for 2014 by more than 40% from the 2013 realized total of $1.8 trillion, down to $1.05 trillion. That's an estimated reduction of more than $750 billion in a single calendar year. When one considers the estimated 18% that residential housing activity contributes to our gross domestic product, can we reasonably expect to achieve a fully functioning economy that sustains homeownership while also creating jobs and stable communities at roughly half of last year's overall mortgage loan production?
Let's be clear - the very thought of reducing the default risk exposure of Fannie Mae and Freddie Mac is not a bad idea in principle. The 97 % loan-to-value mortgage featuring the Qualified Mortgage 'Ability to Repay' rule would presumably do just that, while also protecting responsible access to homeownership. Restricting access to credit while also sidelining the everyday, responsible borrower that these agencies are intended to serve is simply bad policy, never mind the fact that doing so does little, if anything to reduce the overall risk of default.
Keep in mind, Fannie Mae and Freddie Mac already purchase 97% LTV mortgages from state housing finance agencies throughout America.
Why not reinstate this policy to help restore sustainable homeownership for responsible everyday borrowers while also helping to jumpstart America's economy?
Tino Diaz
America's Homeowner Alliance
America's Homeowner Alliance is a national homeownership advocacy and member benefits organization formed to protect and promote sustainable homeownership for all segments of America. For more details visit www.myaha.com.