Magazine article American Banker

Freddie, Fannie Split over Risk of Low-Down-Payment Loan Plan

Magazine article American Banker

Freddie, Fannie Split over Risk of Low-Down-Payment Loan Plan

Article excerpt

WASHINGTON -- A top-ranking Freddie Mac executive explained on Friday that the high risk of default is keeping the agency away from investing in a new kind of low-down-payment loan to lower-income borrowers.

Freddie Mac has not ruled out buying or securitizing such loans in limited pilot programs, according to Mike Stamper, executive vice president of risk management at the agency. But his thinking, as outlined in an interview late last week, is considerably more conservative than Fanic Mac's, suggesting that any steps Freddie takes would be slow and cautious.

Developed by several large insurers, the product would require as little as 3% down. Fanie Mac has entered into a pilot program to buy loans made by eight large lenders and insured by GE Mortgage Insurance Corp. It has also said it is studying similar proposals from Mortgage Guarantly Insurance Corp. and Commonwealth Mortgage Assurance Co. Fredic Mac has so far declined to participate.

Freddie's View

"I think indisputably there is data that default risk is highly correlated with the amount of equity in the property," said Mr. Stamper. "As you go from a 95% loan-to-value ratio up to a 97%-loan-to-value ratio, there is going to be, everything else being equal, an increase in default risk. It's bad for us. It's also bad for the consumer."

Warren Lasko, executive vice-president of the Mortgage Bankers Association, criticized Freddie Mac's position as" absolutely typical of the differences in philosophies at the two agencies these days."

"I think Fannie Mae has shown itself consistenly the more open-minded and more willing to try things -- to experiment -- whereas Freddie Mac, time and again, says, 'We're doubtful, or we're skeptical,'" Mr. Lasko said.

A key concern, Mr. Stamper said, is whether the industry can safely underwrite loans with such a low down payment. "We have some concerns, some reservations about the ability of the industry to really be consumer-type lenders," and scrutinize borrower credit as closely as lenders who make unsecured consumer loans, Mr. …

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