Analysts: Fannie Mae LTV Threshold Will Reduce Options, Not Risk

As of November 1, ""Fannie Mae"":http://www.fanniemae.com/portal/index.html is no longer purchasing loans without minimum down payments of at least 5 percent. Industry experts with the ""Urban Institute's"":http://www.urban.org/ Housing Finance Policy Center argue this move is arbitrary and likely to provide little benefit to the GSE or to taxpayers.

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Fannie Mae's decision to lower its maximum threshold for loan-to-value (LTV) ratios from 97 percent to 95 percent follows a similar decision by ""Freddie Mac"":http://www.freddiemac.com/ a few years ago. While neither GSE will support loans with LTVs higher than 95 percent now, the ""Federal Housing Administration (FHA)"":http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration, ""Veterans Administration (VA)"":http://www.va.gov/, and ""U.S. Department of Agriculture (USDA) will"":http://www.usda.gov/wps/portal/usda/usdahome.

""Fannie's policy change isn't limiting taxpayer risk--rather it's limiting options for borrowers,"" according to Laurie Goodman and Taz George of the Housing Finance Policy Center.

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In a ""blog post"":http://blog.metrotrends.org/2013/09/fannie-mae-reduces-max-ltv-95-data-support-move/ on the Urban Institute's Metro Trends Blog site, Goodman and George said, ""This change places yet another barrier in front of low- and moderate-income families, who are already facing a tightening credit box.""

While it would seem Fannie's objective in lowering the LTV requirement would be to reduce risk, the two authors say this action would be a misguided attempt. They say, ""If the intent was to reduce risk, this was a crude way to accomplish it,"" mainly because among loans with LTVs of 80 percent or higher, credit scores are a better default forecaster than LTV ratios.

In fact, the default rate on loans with LTVs of 95 to 97 percent and high FICO scores is lower than the default rate for loans with LTVs of 90 to 95 percent and lower FICO scores, according to the Urban Institute.

Goodman and George also point out that historically, Fannie Mae has purchased very few loans with LTVs in the 95 to 97 percent range. From 1999 to 2012, these loans made up less than 1 percent of Fannie Mae's purchases, and since 2005, the percentage drops even further.

""We would have hoped that the rich data provided by the Great Recession would give the GSEs the confidence to underwrite higher LTV loans with compensating factors, as the importance of these factors has been well tested and documented,"" Goodman and George stated.

""Instead, Fannie Mae has chosen to draw sharp lines around a smaller permissible credit box without accounting for compensating factors,"" they concluded.