With eased credit restrictions only 3% down payment needed?

Bankrate.com senior financial analyst Greg McBride and University of Pennsylvania Professor of Real Estate Susan Wachter on Fannie Mae and Freddie Mac's deal to ease credit restrictions on borrowers.

Frannie, Freddie to Ease Credit Requirements

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Fannie Mae and Freddie Mac are working with housing regulators and mortgage lenders to ease credit for many consumers who have been shut out of the home buying market due to tighter credit requirements initiated in the wake of the 2008 financial crisis.

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Details of an agreement between the two quasi-government mortgage-servicing giants and the banks will be announced today in a speech by Federal Housing Finance Agency Mell Watt. The FHFA is the U.S. regulatory agency that oversees Fannie Mae and Freddie Mac.

The Wall Street Journal reported last week Fannie Mae, Freddie Mac and mortgage lenders were nearing an agreement to lower barriers and restrictions on borrowers with weak credit in an effort to expand access to home loans and lift home sales. Expanding access to home loans could ultimately provide a jump start to the vital housing sector, benefiting the ancillary lending, construction and retail sectors.

By working closely with regulators to approve new credit structures, Fannie Mae and Freddie Mac hope to insulate themselves from accusations they approved loans that shouldn’t have been approved to consumers with lousy credit histories.

In the aftermath of the 2008 financial crisis, which stemmed directly from the collapse of the U.S. housing market as millions of Americans defaulted on their home loans, Fannie Mae and Freddie Mac were accused of easing credit in order to promote loans and boost their own profits.

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Many private lenders were accused of the same thing.

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Fannie and Freddie are now considering programs that would make it easier for lenders to offer mortgages with down payments of as little as 3% for some borrowers, the Wall Street Journal reported.

Since housing bubble burst, sending the U.S. into a deep recession, lenders have been enforcing far tighter credit standards, making it difficult for many first-time home buyers to scrape together a down payment and qualify for a mortgage.

Consequently, despite historically low interest rates that have brought mortgage rates to their lowest levels in decades, many consumers haven’t been able to take advantage of the low rates and the U.S. housing market has struggled to gain traction as the economic recovery slowly moves forward.

Fannie and Freddie found themselves on the verge of collapse at the height of the financial crisis and were taken over by the government in 2008. They remain in conservatorship.

Congress has been fighting over whether to reform the existing agencies or scrap them altogether. Earlier this year, a bipartisan Senate plan to replace Fannie and Freddie as part of a broader housing-finance overhaul stalled.

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