Put Just 3 Percent Down and Own a House! (Or, Fannie Mae Fails to Learn From Its Mistakes)


joelogon / Foter / CC BY-SA

Submitted for your approval, from a Fannie Mae press release dated December 8:

WASHINGTON, DC – Today, Fannie Mae (FNMA/OTC) announced an option for qualified first-time homebuyers that will allow for a down payment as low as three percent. Building upon Fannie Mae's successful lower down payment program offered through state Housing Finance Agencies, the 97 percent loan-to-value ratio (LTV) option will expand access to credit for qualified first-time homebuyers that may not have the resources for a larger down payment.

This makes official a federal scheme Stephanie Slade noted as pending back in October.

For those with short memories, the Community Reinvestment Act which encouraged home ownership at all costs, including financial prudence, is closely implicated by economic research in the great housing crash of a few years ago. Economists Sumit Agarwal of the National University of Singapore, Effi Benmelech of Harvard, Nittai Bergman of the Massachusetts Institute of Technology, and Amit Seru of the University of Chicago wrote two years ago:

Our empirical strategy compares lending behavior of banks undergoing CRA exams within a given census tract in a given month to the behavior of banks operating in the same census tract-month that do not face these exams. We find that adherence to the act led to riskier lending by banks: in the six quarters surrounding the CRA exams lending is elevated on average by about 5 percent every quarter and loans in these quarters default by about 15 percent more often.

Fannie Mae and Freddie Mac (which also joins in the new round of 3 percent-down fun) feature prominently as major promoters, under HUD direction, of the federal government's "affordable housing" scheme to stick everybody under a roof that they couldn't necessarily pay for. They lobbied and arm-twisted banks to make the high-risk loans that led to such an…interesting result (by which I mean meltdown).

Now, they're back at it. But it will be different this time, just because.