Barclays: New Fannie, Freddie mortgages will take business from FHA

Low-down payment loans getting competitive

The government-sponsored enterprises officially announced Monday the introduction of new, lower down payment mortgages.

And already the mortgage industry is reacting, with one analyst arguing that the boost to Fannie Mae and Freddie Mac could come at the expense of the Federal Housing Administration.

To be sure, these are two different business models: Fannie and Freddie securitize mortgages while the FHA insures them. The low down payment will require private mortgage insurance, but that isn't the only way it could take business from the FHA.

Barclays (BCS) analyst Lokesh Chandra said in an email to clients, “We believe that the product has the potential to pull away 97% LTV purchase loans from FHA, particularly for borrowers with better credit, which should result in adverse selection for FHA loans.”

“It should also have a positive impact on credit availability on the margins as it lowers the cost for a high LTV loan,” he added. Private mortgage insurers say it's a step in the right direction as it lessens mortgage default exposure to the taxpayer.

While there are some key differences between the Fannie and Freddie offerings, only loans owned by GSEs are eligible for the program.

“Therefore, FHA loans will not be able to take advantage of this product for refinancing,” Chandra concludes.

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