Fannie Mae scraps higher down-payment requirements

It's a balancing act that critics and investors worry exposes the company to more risk, as foreclosure rates spike and home prices keep falling.

Washington-based Fannie Mae said Friday it will require minimum down payments of 3 percent for loans made through its computerized underwriting system.

The new policy, effective June 1, replaces a December one that required a 5 percent down payment for home loans in areas with declining real estate prices. Fannie Mae predicts U.S. home prices will drop 7 percent to 9 percent on average this year.

A Freddie Mac spokesman said the McLean, Va.-based company earlier this month adjusted its policies to make 5 percent down payments available in declining markets.

The reversal on down payments come as fears heighten, especially among Republicans on Capitol Hill, that the government will end up bailing out Fannie and its government-sponsored sibling, Freddie Mac, whose share prices have been cut in half over the past year.

While the government is relying on the two mortgage finance titans to stabilize the battered mortgage market, the companies "need to be very careful to manage their risk...that's a a tight rope for them to walk," said mortgage industry consultant Howard Glaser.

Bert Ely, a banking industry consultant in Alexandria, Va. and a longtime critic of Fannie and Freddie, said they were likely under pressure from lawmakers to change their policy in areas with falling home prices. "They caught a lot of flack on this," he said.

Fannie's announcement that it was easing financial requirements for some homebuyers comes just as lawmakers are considering tougher ones for both it and Freddie. The Bush administration has long pushed for stricter regulation.

As senators try to put together a bipartisan housing package, they've proposed tapping a fund drawn from Fannie and Freddie's profits to pay for a new foreclosure-prevention program. Community groups want that money directed to a low-income housing fund.