MReport September 2015 - Cool Under Pressure

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Th e M Rep o RT | 59 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 SECONDARY MARKET the latest low down Payment initiatives Offer Homeownership to Qualified, locked-out Buyers Freddie Mac insists low down payments do not carry inherent risk. n ew low down pay- ment initiatives extend homeowner- ship opportunities to qualified borrowers who might otherwise be locked out. According to Freddie Mac's July U.S. Housing Market Insight & Outlook, pre-crisis low down payment underwriting allowed layered risk, while post-crisis low down payment underwrit- ing controls credit risk by requir- ing features that reduce risk. Pre- crisis payments were variable, while post-crisis payments are predictable. "Affordability initiatives that allow low down payments—like Freddie Mac's Home Possible Advantage—raised concerns about the potential return of underwriting practices preva- lent prior to the financial crisis, Freddie Mac noted. "However, things are different this time." The layered pre-crisis under- writing included a combina- tion of multiple features that increased credit risk, according to the outlook. Meanwhile, post- crisis underwriting in the Home Possible Advantage program includes fixed payments, borrow- er-based underwriting, reliable appraisals, and more. The Home Possible Advantage mortgage was introduced by Freddie Mac in March in order to make home ownership more affordable for first-time home buyers and low- and-moderate income borrowers. Through this program, borrowers can put as little as 3 percent down on their homes. Borrowers can even obtain the down payment as a gift from a family member or employer or as a grant from a government agency. Borrower irrationality has been replaced by realistic expectations, so even some consumers who could qualify for a mortgage are choosing to rent, at least for a while longer, the report said. Freddie Mac predicted housing starts will increase 14 percent and single-family mortgage origina- tions will increase 8 percent in 2015. Freddie Mac's report also suggested an upward revision of the first-quarter GDP will occur, bringing real GDP projections for 2015 to 2.2 percent, up from 2.0 percent in June. The house price forecast was also revised down to 4.4 percent in 2015, but Freddie Mac expects solid house growth to continue so it increased the forecast for 2016 to 3.9 percent, up from 3.5 percent in the previous forecast. "By lowering down payments, programs like Home Possible Advantage extend the oppor- tunity for home ownership to qualified borrowers who might otherwise be locked out," said Sean Becketti, chief economist for Freddie Mac. "Previous research has found that reduced down payments can increase the relative probability of home- ownership among some groups by over 25 percent. As long as the underwriting process bars the return of the layered risks prevalent in the pre-crisis era, lower down payments are not a cause for concern. Home Possible Advantage strikes the right bal- ance—increasing affordability while incorporating the best practices of post-crisis under- writing."

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