Washington's two mortgage behemoths -- Fannie Mae and Freddie Mac -- both have just scrapped their controversial practices of requiring five percent higher downpayments in hundreds of so-called "declining" local real estate markets.

As of June 1, Fannie and Freddie will switch to uniform downpayment minimums nationwide.

Under Fannie's new policy, home buyers anywhere - whether they're in hard-hit Riverside-San Bernadino, California or Austin, Texas, where property values are steadily rising -- will qualify for minimum three percent downpayment programs if they are underwritten and approved through the company's automated system online.

If applicants require a "manual" underwiting, they may still qualify for a five percent downpayment minimum, no matter where their property is located.

Both companies will continue to look hard at appraisals, local market conditions and borrower capacity to handle mortgage payments.

Fannie's top underwriting official, senior vice president Marianne Sullivan, said the abrupt change was made possible by improvements to the company's online Desktop Underwriter system, enabling it to spot "risk-layering" in applications that are associated with defaults and foreclosures.

But political pressure clearly played a role as well. Both Fannie and Freddie were reacting in part to a barrage of criticism leveled at them by real estate, ethnic and consumer group leaders. In the past month, groups including the National Association of Hispanic Real Estate Professionals, the National Community Reinvestment Coalition, the Asian Real Estate Association, and the National Association of Realtors blasted congressionally-chartered Fannie and Freddie.

The groups said that by designating entire geographic areas as "declining" -- and penalizing home buyers with higher downpayments -- Fannie and Freddie were fostering downward spirals in those areas and were blocking any potential for recovery.

Though the two companies' revised standards were welcomed by critics, they may not be the end of the problem in hundreds of ZIP codes around the country that are still stigmatized as "depressed" or "declining" by private mortgage insurers.

Fannie and Freddie both require mortgage insurance protection on all loans they buy with downpayments below 20 percent.

But if private insurers won't touch loans with downpayments below five percent in areas they label declining, the practical effect of Fannie and Freddie's changes may be limited.

Asked if MGIC, the largest insurer, might relax its policies in light of Fannie's and Freddie's announcements, senior vice president Michael J. Zimmerman said in effect: No way!

"We're not contemplating any changes," he said.

So what should buyers in soft markets who need the smallest possible downpayment minimums do?

There's really only one ballgame in town left for them: FHA … . with its three percent down loans -- everywhere.

Published: May 26, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.