The Story Behind Fannie Mae's HomeReady Mortgage
By Kerry Curry | January 19, 2016
Under the Federal Housing Finance Agency’s housing goals for Fannie Mae for 2015 to 2017, at least 24 percent of the single-family owner-occupied purchase money mortgage loans acquired by Fannie Mae must be affordable to low-income families. At least 6 percent must be affordable to very low-income families.
These housing goal guidelines were used to define the targeted population for the HomeReady™ product.
With HomeReady, Fannie Mae remains committed to a safe, responsible balance between expanding access to credit for these targeted borrowers and providing credit terms that support long-term sustainability.
“We want to make sure we meet our housing goals, but our main focus is on providing sustainable financing to support the needs of our targeted borrowers,” says Khristi Waters, a credit risk analyst at Fannie Mae.
Helping Lenders Serve Their Communities
The HomeReady product may also help lenders with their Community Reinvestment Act (CRA) goals, says Wendy Wood, director of credit risk at Fannie Mae. “Lenders are our customers and, in many ways, the HomeReady product aligns with their CRA goals.”
According to the Federal Reserve, the CRA is intended to encourage regulated depository institutions to help meet the credit needs of the communities in which they operate, including traditionally underserved low- and moderate-income neighborhoods, consistent with safe and sound operations. The law was enacted by Congress in 1977 and has been revised and updated since then.
A bank’s CRA record is periodically examined by its federal regulatory agency to see if it is meeting the credit needs of the community in which it operates. The HomeReady product provides lenders with an additional tool that may help them meet their own goals–with Fannie Mae providing liquidity to the market for this purpose.
Flexibility in Mind
HomeReady is designed to provide flexibilities for considering the challenges faced by the targeted borrower population. For example, HomeReady borrowers can include boarder income and rental income generated from a one-unit property with an accessory unit to qualify for the mortgage.
In addition, Desktop Underwriter® permits the consideration of non-borrower household income as a compensating factor to support a borrower with a debt-to-income ratio greater than 45 percent and up to 50 percent. This is an innovative feature based on a practice used by servicers in recent years.
For several years, when deciding whether to approve a loan modification mortgage, servicers have been considering the contribution from non-borrowers living in the household.
Fannie Mae leveraged this concept by acknowledging these types of living arrangements, and allowing for such income to be considered a compensating factor for HomeReady borrowers.
“This new policy moves a concept adopted on the servicing side to the lending side in order to help multi-generational and extended households obtain homeownership,” says Jude Landis, Fannie Mae’s vice president of single-family credit policy and risk management. The income from the non-borrower is not considered as qualifying income–the borrowers on the mortgage must continue to qualify based solely on their own income.
The rationale behind being able to consider a higher debt-to-income ratio for these borrowers is that they may be receiving contributions from others living in the property. These could be actual payments for expenses, or other support such as childcare, that reduce expenses for the borrower.
Landis says the policy behind HomeReady is consistent with Fannie Mae’s long-term goals and mission of limiting risk to all of its stakeholders: lenders, investors, homeowners and taxpayers.
“We want to make sure the policy is sustainable,” she says. “We want to think about creditworthy borrowers and what their challenges really are and try to address them. That is why we’ve come out with new innovative features that we think will set homebuyers up for success.”
Kerry Curry is a freelance writer for several Texas and national publications and is the former executive and magazine editor of HousingWire.