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Th e M Rep o RT | 35 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t ORIGINATION the latest ORIGINATION FHFa director defends low down Payment Programs Republicans voice concerns that low down payment loans carry higher default risks, while Watt staunchly disagrees. F ederal Housing Finance Director (FHFA) Mel Watt, testifying before the House Financial Services Committee, which he once sat on as a Democratic U.S. Representative for North Carolina, insisted mortgage loans with a 3 percent down payment backed by GSEs are no riskier than those with a loan-to-value (LTV) ratio lower than 80 percent. Watt testified before Congress for the second time since becoming director of FHFA a year ago, this time to give an update on the gov- ernment's conservatorship of Fannie Mae and Freddie Mac. Committee Chairman Jeb Hensarling (R-Texas), who has been a vocal critic of Watt's housing policies during the last year, began his five-minute questioning period by stating, "I fear, Director Watt, that you have reversed policies of your predecessor, which will make it more difficult to have a sustain- able finance system," and told the director that not only was the 3 percent down payment loan backed by GSEs bad for taxpayers, but also it was "putting people into homes they can't afford to keep." "If [homebuyers] can only afford 3 percent down, do you believe that 3 percent down is riskier to the home purchaser than 1o percent down?" Hensarling asked. "Again, the same consideration would apply to the borrower as would apply to the lender," Watt said in response. "If you carefully look at other considerations and take them into account in decid- ing whether to extend that credit, or in Fannie and Freddie's case, whether to back that credit, you can ensure that a 3 percent loan is just as safe as a 10 percent down payment loan." Hensarling presented data from FHFA that showed a "precipitous rise in default rates" among mortgage loans with an LTV ratio higher than 90 percent—particular- ly among those with higher than 95 percent, while the performance was "noticeably better" among those mortgage loans with an LTV ratio of less than 80 percent. "With all due respect, I un- derstand what you're saying," Hensarling said with regard to Watt's assertion that the 97 percent LTV loans were safe. "But I fear what you're doing is again, repeat- ing the exact same mistakes that brought us here in the first place, and now you're in a contest with FHA to see who can be the nation's largest subprime lender. I fear we are going in the complete wrong direction with your policy." Later, while being praised for instituting the lower down pay- ment loans by Representative and Committee Minority Ranking Member Maxine Waters (D-California), Watt reaffirmed his stance that those loans are safe. "We have no interest in going back to irresponsible lending, and it's part of our statutory mandate to make sure that doesn't happen," Watt said. "We are not going to sanction loans backed by Fannie and Freddie and the taxpayers that are not reliably expected to be paid." Regarding the issue of a pro- posed rule to tighten membership requirements in the Federal Home Loan (FHL) Banks, Watt respond- ed to questions from Representative Frank Lucas (R-Oklahoma), who said he hopes the Committee would "be very sensitive about doing anything to a model that has worked really well and is working well," for the FHLBanks. "We have no agenda other than making sure that members of the Federal Home Loan Banks meet the criteria that Congress has established for membership," Watt said. "I know this is a controversial issue, because we put out the rule and we got 1,300 comments. That's almost unprecedented. We're going to go through every one of those comments and evaluate every single one of them. Most of them, I would say 90 percent of them, appear to be against the proposed rule. Obviously, we touched a nerve. But we are going to apply the statute and try not to have the adverse impact that people are contemplat- ing might be a result." average down Payments rise in Q4 While doWn payments are up from a year earlier, the trend may not persist due to changes at the gses and fha. Down payments on houses trended upward in the fourth quarter of 2014, jumping more than 1.5 percentage points from the previous year, LendingTree said last month. According to the company's most recent data, the average down payment on conventional, 30-year fixed-rate loan offers made to LendingTree borrowers last quarter was 17.59 percent, up from 16.01 percent in the final months of 2013. A down payment of 20 percent is typically required for borrowers to avoid having to pay for mortgage insurance. In dollar amounts, the average down payment was up about $2,000 to $47,585. "The improving job market, rising home values and low mortgage rates have helped to bring borrowers with size- able down payments in to the housing market during [the] fourth quarter," said Doug Lebda, founder and CEO of Lend- ingTree. "It's encouraging to see respon- sible borrowing behavior. A substantial down payment will allow borrowers to build home equity, ease lender risk, avoid paying [private mortgage insurance] and reduce monthly mortgage payments, all of which will help to further strengthen the overall economy." While down payments have been on the rise, the trend may not last with the launch of new low down payment prod- ucts by Fannie Mae and Freddie Mac and a recent reduction in annual premiums for mortgages insured by the Federal Housing Administration (FHA). Arkansas ranked lowest among the states for down payment percentages, averaging 14.70 percent in Q4 ($31,293 in dollar amount). Also sitting low on the list were North Dakota (15.09 percent, or $30,869); Indiana (15.18 percent, or $32,307); Missouri (15.55 percent, or $31,808); and Ohio (15.62 percent, or $31,140). At the other end of the spectrum, the District of Columbia boasted the highest average down payment percentage at 20.26 percent, followed by New York (20.02 percent) and California (19.83 percent). At the market level, the Golden State was home to the highest down payment percentages in the nation, led by San Jose (23 percent) San Francisco (22.16 percent), and San Diego (21.29 percent). "We have no interest in going back to irresponsible lending, and it's part of our statutory mandate to make sure that doesn't happen." — Mel Watt, fhfa