Will Low Down Payments Bring First-timers Home?

Suddenly More first-time buyers are buying homes.  More are making down payments even as lenders rush to sign up for the new 3 percent down programs launched by Fannie and Freddie in November.  Coincidence or can we connect the dots?

It’s too soon for the new programs to have an impact on sales, but the odds are good that when they do the first-timer spike in sales may turn into a trend.  Loosening standards, improving incomes, soaring rents-whatever the cause, as the New Year begins there’s a refreshing new wind blowing throughout housing markets coast to coast.

According to the National Association of Realtors, first-time homebuyers accounted for 31 percent of existing home sales in November (29 percent in October 2014; 28 percent in November 2013.  Initial December data indicated a pickup of purchases from first-time buyers in November, likely a result of the improving job market and the decline in interest rates to 4 percent.

Zillow predicts that first-time buyers who stayed out of the market – either for demographic reasons or because they just couldn’t find the right entry-level home – will have a breakthrough year in 2015.rding to Zillow.  Zillow’s predictions are based on data showing rents continuing to skyrocket while the for-sale market levels off. That economic reality, increased inventory, and millennials getting married and having children after delaying those choices, will give buyers more negotiating power.  In fact, Zillow predicts the millennial generation will overtake Generation X as the biggest group of home buyers in 2015.

Meanwhile the majority of first-time home buyers making a low down payment appears to be uptrend. Among first-time buyers reported to be obtaining a mortgage in the months of September through November, about 66 percent made a down payment of 6 percent or less.  This is a decline from the 77 percent figure in early 2009, but an improvement from the 61 percent figure at the beginning of 2014.  In 2014 the average down payment for first-time buyers was

On December 8, Fannie Mae and Freddie Mac announced the acceptance of loans originated with a 3 percent down payment under certain qualification guidelines to increase credit availability to first-time buyers meeting eligibility standards. In the case of Freddie Mac, borrowers will be required to participate in a borrower education program. In the case of Fannie Mae, borrowers will still have to meet the standard eligibility underwriting requirements such as those relating to income, employment, and debt, and borrowers will be required to purchase private mortgage insurance. Borrowers making a low down payment may still face higher costs for risk adjustment (called loan level pricing adjustments) in the case of GSE-backed loans.

Within weeks, mortgage lenders—all non-banks—began lining up to announce they were going to participate.

First out of the box to sign up for FHFA program were 360 Mortgage Group and ditech, both with 97% LTV into their product offerings.   Guardian Mortgage Company, Citywide Financial in San Diego, Houston lender AMCAP Mortgage and Michigan-based United Wholesale Mortgage were among of the first to announce they would participate in the GSE programs.

Meanwhile, before the details were even announced, Bank of America came out saying that it does not plan on easing its mortgage standards or offering 3% down mortgages, despite regulators seeking to expand lending.  Wells Fargo said it is currently in the process of examining the new product.

Said Erin Lantz, the vice president of mortgages at Zillow, “We expect the adoption (of the GSE low down payment programs) will increase in 2015, but it’s too soon to see a material improvement in credit availability for low down payment consumers.”