Fannie Mae will accept down payment assistance funded by the lender

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Fannie Mae will now purchase mortgages with lender-funded subsidies, including down payment assistance, closing costs or financial reserves.

The change could give non-bank lenders a way to guard against accusations of redlining.

The government-sponsored company will immediately begin accepting these loans. According to Fannie Mae’s advice, “The lender must have a documented program that provides grants for low-to-moderate income borrowers, community development, fair housing initiatives, or similar initiatives.”

Lenders’ special purpose credit programs – tailored to underserved groups – would do the trick. There are, however, a number of additional caveats for a mortgage with a lender-funded subsidy to qualify for sale to Fannie Mae.

The borrower must contribute 3% from other sources of financing. The loan must be secured by a principal residence. The loan must also be underwritten through Fannie Mae’s HomeReady program, which targets low-income borrowers and gives lenders an initial fee reduction if the borrower has a high loan-to-value ratio and credit rating. greater than 680.

Why a lender would set up a down payment relief fund with their own money — rather than from a public housing finance agency or other source — is unclear, according to advice from Fannie Mae.

Fannie Mae did not respond to a request for comment.

For banks, there is a potential incentive to do targeted programs. They could get credit for passing their Community Reinvestment Act exams, depending on the outcome of the major rewrite of that act.

Non-banks, however, are not subject to the law.

GSE incentives could encourage non-bank lenders to create special purpose credit schemes. But there is another, potentially more pressing motivating factor: the creation of special-purpose credit programs could help non-bank lenders avoid being labeled a redliner.

“A non-bank would do it to avoid accusations of redlining,” said David Stevens, CEO of Council in mountain lake. “For some larger IMBs, it may make sense to establish a [down payment assistance] funds to show their proactive effort in this error. One stitch in time saves nine, as my mother used to say.

Regulators have indicated they are now looking to non-bank mortgage lenders to assess whether they are redlining. And this despite a report published in February by the Urban Institute which found that non-banks gave a greater share of their home purchase mortgages to homeowners to borrowers of color than banks.

But accusations of redlining from regulators are now much more than empty threats.

The Consumer Financial Protection Bureau and the justice department recently settled with a non-bank mortgage lender Trident Mortgagea subsidiary of Berkshire Hathaway Home Services, for $24 million. This marked the second largest redlining settlement in DOJ history.

There may be more to come. Sources told HousingWire that there are a significant number of redlining cases pending at the DOJ, and at least some of them are targeting non-bank lenders. Daniella Casseres, partner at Michael Sandlersaid his firm represented lenders in several redlining cases.

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