0% down and 1% down mortgage offerings just started to gain traction in the industry when Freddie Mac announced it is changing the requirements and completely nixed its program option.
The government-sponsored enterprise shocked the market this week when it announced it is changing the requirements to its low down mortgage program and will no longer allow lenders to contribute gifts or grants to reach the 3% down payment requirement.
The move shut the door on what was becoming a fast-growing mortgage lending option for first-time borrowers due to its appeal to borrowers who struggle to overcome one of the biggest barriers to homeownership: the down payment.
Fannie Mae and Freddie Mac first introduced 3% down payment options back in 2014, getting the industry comfortable once again with low down options after they disappeared after the financial crisis.
It didn’t take long for some of the nation’s biggest mortgage lenders to jump on board, including Bank of America, Wells Fargo and JPMorgan Chase.
And by 2015, the industry took the idea a step further and started to roll out 1% down and eventually no down mortgages by working with Freddie on its 3% down program, also known as the Home Possible Advantage program.
Quicken Loans led the pack, with a 1% down mortgage that launched in late 2015.
Guaranteed Rate followed suite shortly thereafter and launched a 1% down product of its own in the summer of 2016. Around the same time, United Wholesale Mortgage announced a 1% down payment option. UWM said it would provide eligible homebuyers with a 2% lender-paid down payment that gives consumers a 3% equity at closing.
Each program saw the lenders “granting” 2% of the down payment to the borrower. Add that to the borrower’s 1% contribution, and you have the 3% needed to qualify for the Fannie and Freddie programs.
Then, Fifth Third Mortgage went beyond Quicken, Guaranteed Rate, and other lenders that began originating 1% down mortgages with Freddie, when it rolled out a 0% down mortgage program last year.
Even as recent as this June, Movement Mortgage announced a zero down payment assistance program for first-time homebuyers, saying it would provide grants up to 3% of a home's sales price, thus creating 97% conventional financing.
Help spur homeownership and give first-time homebuyers an affordable conforming, conventional mortgage option.
And according to an interview with Quicken Loans and United Wholesale Mortgage that is exactly what the programs were doing.
Bill Banfield, the executive vice president of capital markets for Quicken Loans, said in an interview, “From our perspective, when we rolled out the program, it was an instant success.”
Banfield added that Quicken also set up a lot of monitors to make sure the program performed well. In fact, the loans in Quicken’s 1% down program have a delinquency rate of less than one quarter of one percent.
As Banfield explained in a previous interview on Quicken’s 1% down, after Fannie and Freddie changed some of the stipulations to the original 3% down programs they launched, they witnessed a pick up in the borrowers using the low down option.
And while Freddie Mac decided to go in a different direction, Banfield said that Quicken Loans isn’t done innovating. They don’t have anything planned yet to fill the hole but remain excited about the future thanks to their other mortgage offerings, such as Rocket Mortgage, their online digital mortgage.
Banfield emphasized, “The one thing to keep in mind is that this appears like it is something being taken away, but there are other options out there. Whether it’s FHA or other programs, people can still explore their options to see what they qualify for.”
United Wholesale Mortgage CEO Mat Ishbia echoed similar sentiments toward the program going away in an interview, saying, “I think that it’s a great program for consumers, and we are disappointed that Freddie Mac dropped the program.
Ishbia, however, added, “We are proud to still offer it for our brokers despite Freddie pulling out of the program. We want to continue to support consumers.”
UWM saw so much success in the program that they had to double the budget to $20 million this year because of the demand from brokers and homeowners it was helping across America.
When UWM first introduced the 1% down back in July 2016, Ishbia said, “The 1% down program we’re introducing is a new alternative to the 3% down programs that already exist. It’s a conventional loan that is designed for people with a strong credit payment history who want to keep as much money in their wallet as possible when buying a home.”
There is a key difference between UWM’s offerings and the low down offerings other lenders put out. Rather than price some of the savings into the loan, UWM offered the grant and did not require a rate increase for borrowers, but rather increased the FICO score requirement.
This concept, premium pricing, is something Freddie addressed in its new announcement.
The new changes from Freddie stated, “We are revising our requirements to state that gifts or grants from the Seller as the originating lender will be permitted only after a contribution of at least 3% of value is made from Borrower personal funds and/or other eligible sources of funds. Gifts or grants from the Seller must not be funded through the Mortgage transaction, including differential pricing in rate, discount points, or fees for individual loans or across the Home Possible offering.”
Ishbia expanded on this change, saying, “If the loan on a 3% down is at the exact same place and fees as the 1% down, there should be no problem offering them, but my understanding is that’s not how all lenders are doing the program.”
To Ishbia, “If ‘skin in the game’ was the main reason for low down mortgages, they wouldn’t have just taken away the 2% gift from the lenders, they would have taken away all gifts.”
Skin in the game is not the only measurement, he said.
“I think there are great ways to do low down payment programs such as VA loans, which have offered low and zero down mortgages with no mortgage insurance for years,” said Ishbia.
“There is history of these programs doing well. And for those that say it’s a different type of gift, well, if you’re worried about a gift from an interest party, a lender is not an interested,” said Ishbia. “If they don’t charge more in premium pricing, they are not making any more money. Whether it’s 3% down or 1%, borrowers are getting the exact same deal.”
And as Ishbia previously noted, brokers are seeing great success with the program.
But despite demand, Quicken Loans and UWM will both be required to stop offering loans below 3% through Freddie, starting Nov. 1, 2017. Click here to read Freddie Mac's announcement in full.
