Freddie Mac pulls plug on low down payment loans

TRD New York /
Aug.August 04, 2017 09:33 AM

One percent down on a new home loan? Zero down? Generous gifts of thousands of dollars from mortgage companies to help you swing the deal?

If any of these sounds attractive to you, here’s a little sobering news: One of the country’s two largest mortgage sources is eliminating them.

In a surprise move, giant investor Freddie Mac announced that it is ending purchases of certain low down payment loans that include lender contributions to the buyers’ down payments. Under these programs, a lender might reduce the required minimum down payment on a Freddie Mac “Home Possible Advantage” loan from 3 percent to just 1 percent. The 2 percent difference would be provided by the lender as a gift.

Under the revised policy, borrowers will need to come up with at least 3 percent of the value of the house from their own personal resources for the down payment, though some of the money can come from traditionally allowable sources, such as gifts from relatives. If lenders choose to provide grants or gifts to borrowers, they can only do so after the borrower makes the required minimum investment of 3 percent.

Freddie Mac did not provide a specific reason for its abrupt change, but stipulated that lenders providing gifts or grants to borrowers should not charge higher interest rates or fees to recoup their investments. Industry sources told me that some lenders were charging significantly higher rates and other compensation under Freddie’s popular low down payment program, and that borrowers weren’t always aware that the seemingly magnanimous gifts from the lender were being financed by themselves through higher monthly payments over time.

Known as “premium pricing,” the practice was not prohibited by Freddie previously but now is banned. Industry sources also said that Freddie’s policy of allowing premium pricing was at odds with the preferences of its government regulator, the Federal Housing Finance Agency, which had expressed concerns over possible consumer misunderstanding and abuses.

Here’s a hypothetical example of how the premium pricing worked in some 1 percent down programs. It was provided by Judy Zucker, vice president of FM Home Loans LLC of New York. A lender might charge an interest rate of 4.125 percent for standard 3 percent down loans but would hike that to 4.75 percent for a mortgage with a 1 percent down payment and a 2 percent gift.

Zucker, whose firm has not offered super-low down payment loans with gifts, said on a $350,000 home purchase the premium pricing would add $162 a month to a borrower’s payments — potentially for 30 years.

“Personally,” Zucker, wrote in an email, “I feel it’s not necessarily in the best interests of the client to take these loans.” That’s especially the case if the pros, cons and costs of the loan are not properly explained by the loan officer.

Freddie Mac’s policy switch won’t mean that very low down payment mortgages will disappear from the marketplace. Fannie Mae, Freddie’s larger competitor, continues to offer these loans through its network of participating lenders. Unlike Freddie, Fannie’s rules have prohibited premium pricing and have required lenders to ensure that their “gifts” are truly gifts, not financed by higher charges to the borrower tucked away somewhere in the transaction.

Mat Ishbia, president and CEO of United Wholesale Mortgage, a large national lender and early proponent of super-low down payment loans, told me his company’s approach has been to provide “true gifts” — up to a $5,000 maximum — from the start.

The interest rate and fees on a standard 3 percent down payment mortgage from his company, according to Ishbia, are the “exact same” as on a 1 percent down loan that uses gift contribution. Ishbia said his firm has funded ” thousands” of super-low down payment loans, and high demand has forced him to double the initial $10 million set aside for gifts to $20 million. Ishbia said the company has sold the loans to both Freddie Mac and Fannie Mae.

So what does all this mean to you if you’ve been planning to buy a home with a tiny down payment? To begin with, be aware of the premium pricing issue: None of these loans involving “gifts” should charge you more than a standard 3 percent down plan. Ask about it.

Also be aware that 3 percent and 1 percent loans come with their own special requirements: income limits and sometimes higher credit score minimums. If you’ve got sub-par credit, don’t expect any gifts from the lender.

Related Articles

Zillow CEO Rich Barton (Credit: iStock)

Zillow and Opendoor aren’t making much on home-flipping

This week, the State Department of Taxation and Finance issued a new memo that notably made no mention of condos. (Credit: iStock)

Regulators quietly change stance on condos in LLC law

28 Liberty Street, 335 Madison Avenue, One Manhattan Square and 1295 Fifth Avenue (Credit: Google Maps, StreetEasy)

These were the 10 largest Manhattan real estate loans in October

Realogy CEO Ryan Schneider (Credit: iStock)

Realogy’s plan to stop the iBuyers from gaining a foothold in Chicago

Daily Digest Thursday

Worker killed at Lam Group construction site, Uber signs WTC lease: Daily digest

Developers are offering to pay the increased mansion and transfer taxes to give them an edge in a difficult market. (Credit: iStock)

Amid slow sales, developers give buyers a break on mansion taxes

Triplemint’s David Walker and John Scipione with Hoboken, New Jersey (Credit: iStock)

Triplemint expands to New Jersey

Brokerage firms are strategizing ways to make up losses after the cost of application fees was capped at $20. (Credit: iStock)

Brokerages on rental application fee cap: “It hurts”