The nation's largest provider of mortgage funds, moving to increase homeownership among minorities and low-income residents, 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 pilot program will begin in 15 states, including California, and the District of Columbia. It is expected to expand nationwide early next year.
It is designed to provide home-ownership 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, those consumers are forced to turn to so-called sub-prime lenders that charge higher mortgage rates, he said.
Under the new Fannie Mae program, a borrower will pay interest rates 0.5 to 2 percentage points higher than those consumers who have better credit histories, greater down payments or more in savings. The loans can be used to buy or refinance a home.
If the borrower makes payments on time for two years, the interest rate will be reduced by 1 percentage point. For example, a consumer who is granted a $100,000 30-year fixed-rate mortgage at 9.5% 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 & 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 that nearly half 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 the new program's lending requirements.
But lenders are uncertain how much business the loans will generate. "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.
"But this will be a niche program that otherwise would not be 'sellable' to Fannie Mae," he said.
Though it doesn't lend money to consumers, Fannie Mae helps set lending guidelines. Lenders who sell mortgages to the federal agency can realize immediate profits, lowering their risks and freeing up funds for more home loans.