The nation's largest provider of mortgage funds, moving to increase homeownership among minorities and low-income citizens, unveiled a program Thursday to loosen lending standards for people with "slightly impaired" credit.
The Federal National Mortgage Assn. said it will encourage banks and other financial institutions to accept borrowers with blemished credit who may not otherwise qualify for conventional loans.
The program will begin on a pilot basis in 15 states, including California, and the District of Columbia. It is expected to expand nationwide early next year.
It is designed to provide homeownership opportunities for "many borrowers whose credit is just a notch below" qualifying for a loan, said Franklin Raines, Fannie Mae's chairman and chief executive.
Currently, the consumers are forced to turn to so-called sub-prime lenders who charge higher rates, he said.
Under the new Fannie Mae program, borrowers will pay interest rates one-half to 2 percentage points higher than those consumers who have better credit histories, sufficient down payments or savings. The loans can be used to buy or refinance a home.
If the borrowers make payments on time for two years, the interest rates will be reduced by 1 percentage point. For example, a consumer who is granted a 30-year, fixed-rate $100,000 mortgage at 9.5% interest initially would pay $841 a month. After two years of timely payments, the interest rate would be reduced to 8.5%, cutting the monthly bill to $769.
In Southern California, Newport Beach-based Downey Savings and Loan and Santa Ana-based Mission Hills Mortgage Corp. are participating in the pilot program.
The market for these loans is significant, said Frank Demarais, Fannie Mae's vice president of product development. He estimated up to half of the consumers in the $150-billion sub-prime market, who borrow from finance companies at higher interest rates because of less-than-stellar credit ratings, would meet lending requirements in the new program.
But lenders who will offer the mortgages were uncertain how much business would be generated through the loans.
"It's a little early to tell what the potential is," said Kevin Hughes, Downey's director of secondary marketing. "I don't believe this will be, from a volume perspective, our biggest producer. The standard 15- and 30-year conventional loans sold to Fannie Mae will be the larger percentage of loans.
