According to a new study from the New York Federal Reserve the best way to stimulate demand is to reduce down payments, a strategy that’s more effective than lowering interest rates-whicb is probably obvious to most street Realtors. Now it can be proved scientifically.
The Fed economists queried prospective buyers to determine their willingness to buy a home under different financing scenarios. They varied down payment constraints, mortgage rates, and non-housing wealth. They found that relaxing down payment requirements from 20 percent to 5 percent increased willingness to buy by 15 percent. The response was stronger among less wealthy respondents and renters, whose willingness to buy soared as much as 40 percent. By contrast, changing the mortgage interest rate by 2 percent changed willingness to buy only 5 percent.
Right on time, Fannie and Freddie launched new programs this week that moves the down payment needle even lower for qualified buyers—to 3 percent, lower than FHA.
Only first-time buyers will qualify for the Fannie Mae program and loans must have private mortgage insurance or other risk sharing, which raises the price for buyers. Borrowers must take homeownership education classes and loans must be fixed rate. Lenders will be in the first loss position and mortgage insurers and other risk sharing partners will have to conclude that these loans are prudent to make in order for these loans to be originated and delivered to Fannie Mae in the secondary market. Borrowers cannot use gifts for the down payment.
Freddie Mac’s program is limited to moderate and low income buyers, who must earn the median income in the area where they plan to buy or less, and must have the funds to meet the down payment requirements and closing costs. Borrowers must also to participate in an acceptable borrower education program, like the company’s CreditSmart®, to qualify. Borrowers need to meet minimum credit requirements. Loans under the program can be used to refinance but not for cash-out refinancing. Freddie will allow the 3% down payment to come from a number of sources, including personal funds, gift funds, grants and affordable second mortgages.
“Our goal is to help additional qualified borrowers gain access to mortgages,” said Andrew Bon Salle, Fannie Mae Executive Vice President for Single Family Underwriting, Pricing and Capital Markets. “This option alone will not solve all the challenges around access to credit. Our new 97 percent LTV offering is simply one way we are working to remove barriers for creditworthy borrowers to get a mortgage. We are confident that these loans can be good business for lenders, safe and sound for Fannie Mae and an affordable, responsible option for qualified borrowers.”
The new programs were promised by FHFA Administrator Mel Watt in an October speech to the Mortgage Bankers Association. In light of the new study by the New York Fed, their impact on the housing economy may be greater than even he anticipated.