GSEs, private mortgage lenders trending in opposite directions

In October, this blog reported on the decision by the Federal Housing Finance Agency (FHFA) to ease standards for mortgage lending by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. The new rules went into effect on December 1, expanding access to mortgage loans by borrowers with credit scores as low as 620. Moreover, reports suggest that this could be a prelude to a lowering of the minimum required down payment from 5 to 3 percent.

These measures are part of a push by authorities to jumpstart the housing market with minimal risk of recreating the conditions that led to the subprime mortgage crisis. Fannie and Freddie's mortgages will be more affordable than other government alternatives, but the low down payment options will require the purchase of private mortgage insurance.

Conversely, some 700,000 private borrowers could soon see their mortgage rates rise, according to a report issued by Fitch Ratings. Monthly payments are due to reset for many loans that were taken out 10 years ago, in the midst of the bubble. Specifically, the resets will apply to jumbo mortgages, which are issued by private lenders for larger amounts than Fannie and Freddie allow, and those classified as Alt-A, neither prime nor subprime.

The housing market will no doubt continue to feel the effects of the recession over the coming years, in the form of payment resets like this one and of tighter government regulations. With mortgage loan servicing software, lending companies can track payments and ensure the continued good health of their business.