Freddie Mac, Bank Of America Launch Another 3% Down Mortgage Program

Back in October we posted the following image on the way to introducing a new mortgage product co-sponsored by Quicken and Freddie Mac.

In what the companies billed as “a new effort dedicated to building a better American housing system,” Quicken and Freddie announced what they called an “innovative solution” to “meet the needs of emerging markets, including millennials, first-time homebuyers and middle-class borrowers.”

What’s “innovative” about Quicken and Freddie’s “solutions”, you ask? Well for one thing, they’re willing to give millennials a home loan with just 3% down. That’s great if you’re a struggling graduate waiting tables and having a hard time saving enough money for a down payment, but it’s not so great for the stability of the US housing market and/or the financial system which got itself into all kinds of trouble making just these kinds of loans nine years ago.

You might recall that earlier this year, House Financial Services Committee Chairman and Yellen detractor Jeb Hensarling lambasted FHFA chief Mel Watt’s announcement that Fannie Mae and Freddie Mac will seek to back loans with down payments as low as 3%.

"I am extremely concerned about Director Watt's efforts to force taxpayers to back high-risk mortgages with ultra-low down payments as little as 3%," Hensarling said in a statement.

Obama cut mortgage-insurance premiums on FHA loans last January and in September, originations of FHA-backed mortgages were up 54% from a year earlier, Bloomberg reported last month. "By December, the FHA insured 22 percent of all loan originations, up from 17 percent a year earlier."

Now, in what looks like an effort to get back at the FHA for the $800 million the agency extracted in connection with "errors" made on insured loans, Bank of America is partnering with Freddie Mac on yet another scheme that will allow borrowers to get home loans with as little as 3% down.

"Bank of America is rolling out a new-mortgage product that would allow borrowers to make down payments of as little as 3%, in a move that would represent an end run around a government agency that punished the bank for making errors on similar loans," WSJ reported, earlier today. "The new mortgage program, which the Charlotte, N.C.-based lender plans to unveil on Monday, will let borrowers avoid private mortgage insurance, a product to protect mortgage lenders and investors that is usually required for low-down-payment loans and that could make the new loans cheaper than those offered through the Federal Housing Administration."

Essentially, BofA has cut the FHA out. "After making a mortgage under the new program, Bank of America will sell it to Self-Help, which then sells it to Freddie Mac," The Journal goes on to recount. "If a mortgage defaults, and Self-Help isn’t able to recover the full amount owed, Self-Help takes a big chunk of the losses before Freddie Mac starts to take a loss, which lets borrowers avoid paying mortgage insurance."

So there. Take that FHA. That's what you get for holding banks accountable for making terrible underwriting decisions. 

“We need an alternative in the marketplace that helps creditworthy borrowers with a track record of paying debts on time,” Bank of America managing director D. Steve Boland, said. “We think there are still a lot of uncertainties out there in working with FHA.”

Of course this means a greater percentage of low downpayment mortgages will end up being guaranteed by Freddie. "As lenders become more wary of the FHA program, lenders and Fannie and Freddie executives said that their programs’ volume could rise," WSJ continues.

Because that's just what taxpayers need. Fannie and Freddie making more bad loans.

Gee, it's a good thing the GSEs have adequate capital buffers. Oh, wait...