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APFannie Mae scraps higher down-payment requirementsFriday May 16, 6:03 pm ET By Alan Zibel, AP Business Writer
Fannie Mae scraps increased minimum down-payment requirement for homes in flagging markets
WASHINGTON (AP) -- By relaxing down-payment requirements for borrowers in markets where home prices are falling, Fannie Mae aims to both resuscitate the flagging housing market and respond to pressure from industry groups, consumer advocates and lawmakers.

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.
Congress created Fannie and Freddie to pump money into the home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street. Together they hold or guarantee about $5.3 trillion in home-mortgage debt.
Their formidable size helps them support the mortgage market in times of trouble. But critics fear that these troubled times are too much for the companies to handle the losses, making a federal bailout inevitable.
"These guys are real close to being part of the problem, rather than part of the solution," said Thomas Stanton, a fellow at Johns Hopkins University's Center for the Study of American Government.
While the Treasury Department isn't obligated to assist Fannie or Freddie in a financial emergency, there is a perception notion on Wall Street that the government would bail them out if there is a collapse. Critics say the government's implicit backing allows the companies to take on far more debt than a bank.
James Lockhart, director of the federal Office of Housing Enterprise Oversight, said in a speech Friday the companies' high level of debt relative to assets "could pose significant risk to taxpayers ... financial institutions and other investors."
More evidence of their increased vulnerability, Lockhart said, are three straight quarters of losses for both, totaling nearly $11 billion.
Fannie had been under intense pressure from real estate agents, homebuilders and consumer advocates to relax what they saw as rigid policies that shut out borrowers with good credit.
"From the time it was announced, we've been asking them to reconsider," said Jerry Howard, president of the National Association of Home Builders, said in an interview.
Mortgage brokers welcomed the news. Alan Rosenbaum, chief executive of mortgage banker and broker GuardHill Financial Corp. in New York, said the change "is probably the first step in turning things around" as the mortgage industry has tightened its lending practices too much, leaving many borrowers out in the cold.
While the change is positive, Karen Cooper, a mortgage broker and owner of Quality Home Loans in Ashland, Ore., said borrowers face numerous other obstacles,
For example, mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged ZIP codes around the country where they refuse to insure some home loans.
In working with first-time homebuyers, she said, "we just keep sorting through guidelines until we find what works,"
Fannie Mae shares fell 34 cents to close at $28.89, while shares of Freddie Mac fell 30 cents to close at $26.97.