Freddie Mac New Mortgage Pilot Program

By Kevin Chambers

This blog post is a follow up to the Topic Paper US Mortgage Market: America’s Biggest Nationalize Industry that discussed the over involvement of the federal government.

Last week Freddie Mac introduced a new program, called Your Path, to loosen the restrictions needed to get a mortgage. After the 2008 crisis, mortgage originators locked down on the underwriting criteria needed to qualify for loans. This shut out a portion of lower income Americans of the homeowner’s market. Freddie Mac, which purchases 1 in 4 mortgages in the US, is trying to increase originations for 1^st-time buyers.

Initially, the change will be implemented by two mortgage companies: New American Funding and Alterra Homes. Both of these companies specialize in working with low-income mortgage seekers. Through the plan, they are required to sell all of these mortgages to Freddie Mac. The program specifically lowers income criteria but doesn’t loosen standards for down payments or credit scores.

Just like the extensive involvement of the Federal Government in the mortgage market, this story is going largely unreported. Offering affordable housing is an important policy question. Giving more people, especially those disadvantaged by society, opportunities for homeownership is an admirable goal. However, this program harkens back to some of the underlying problems that spurred the mortgage crisis. Most concerning is that all of these mortgages will be on the balance sheet of Freddie Mac. These mortgages will be inherently riskier than the general population, and they are being consolidated in one place. This small pilot program doesn’t seem to be on a large enough scale to be overly concerning. Nevertheless, it will be important to monitor the changes in the mortgage market and see if a trend of lowering standards for mortgages develops.