Freddie Mac stops accepting lenders’ ‘gift’ down payments

In a surprise move, giant investor Freddie Mac announced that it is ending purchases of certain low-down-payment loans that include “generous” lender contributions to the buyers’ down payments.

Under these programs, a lender might reduce the required minimum down payment on a Freddie Mac “Home Possible Advantage” loan from 3 percent to 1 percent. The other 2 percent would be provided by the lender.

Under the revised policy, borrowers will need to come up with at least 3 percent of the value of the house from their own personal resources.

Freddie Mac did not provide a specific reason for its abrupt change, but it stipulated that lenders providing gifts or grants to borrowers should not charge higher interest rates or fees to recoup their money. Industry sources told me that some lenders were charging significantly higher rates and other compensation under Freddie’s popular low-down-payment program, and that borrowers weren’t always aware that they themselves were financing the seemingly magnanimous gifts.

Judy Zucker, vice president of FM Home Loans of New York, provided an example of how the “premium pricing” often works. A lender might charge an interest rate of 4.125 percent for standard loans with 3 percent down, but hike that to 4.75 percent for a mortgage with a 1 percent down payment and a 2 percent gift.

On a $350,000 home purchase, this “premium pricing” would add $162 a month to a borrower’s payments — potentially for 30 years, said Zucker, whose firm has not offered the loan “gifts.”

“Personally,” Zucker said, “I feel it’s not necessarily in the best interests of the client to take these loans.”

Fannie Mae already required lenders to ensure their “gifts” are not financed by charges to the borrower tucked away somewhere in the transaction.