Student loan debt pilot underway with 10 Fannie Mae lenders

November 27, 2017 | By

A Fannie Mae lender with a better idea on handling student debt has sparked a 10-lender pilot program now being tested in the marketplace.

The idea came from Eagle Home Mortgage, the lending arm of national homebuilder Lennar. In a nutshell, Lennar wanted to test expanding the interested-party contribution limitation to help buyers burdened with student debt. Lennar was given a 90-day period to begin testing the program before it was opened to nine other builder-affiliated lenders, also Fannie Mae customers.

It’s this type of partnership with its lender-customers that Fannie Mae hopes to continue developing going forward. “Our lenders are in the market with boots on the ground where they see and hear first-hand from homebuyers on ways lenders could better serve them,” says Jonathan Lawless, vice president of customer solutions at Fannie Mae.

Test-and-Learn Pilot

To help solve tough housing challenges and serve more creditworthy borrowers, several lenders are working with Fannie Mae’s Customer Solutions team on small test-and-learn pilots.

Doug Cropsey, senior vice president of secondary marketing at Eagle Home Mortgage, said the collaborative partnership worked to design and solidify a program to solve a widespread housing challenge.

“In recent years, we’ve seen apprehension, particularly amongst younger buyers, to take out a mortgage while they were working to pay off student debt,” Cropsey says.

“We tried to have some out-of-the-box thinking in partnership with Fannie Mae to break down this student debt barrier, whether it be real or psychological.”

Once the idea was hashed out that Lennar would offer to pay off a portion of a prospective buyer’s student loan debt if they bought a Lennar home, the proposed program was refined and vetted by Fannie Mae’s risk and legal department experts.

How It Works

The pilot expands the interested-party contribution limitation to include an additional builder contribution. The variance being tested allows for an additional 3 percent to be paid specifically by the seller, or under this pilot, the homebuilder, and that amount must go specifically to pay down student debt. The borrower assistance provided by the builder through the variance must be a true gift and prohibits premium pricing in any form.

A prospective homeowner must still meet all credit and income guidelines with his or her student loan debt included in the computations. Additional student debt underwriting flexibilities introduced in the Fannie Mae Selling Guide earlier this year can also be used.

Homebuilders in the pilot can pay off up to $13,000 in student loan debt, which is paid by the seller at closing. Even if the student loan debt is paid off entirely under the variance, Fannie Mae still requires that the homebuilder and affiliated mortgage company qualify the borrower by including all student loan debt in the qualification computations.

“That’s a pretty good guardrail to make sure the ability to pay the mortgage is there,” Cropsey says. “This is not a return to some of the more liberal lending practices that existed prior to the housing crisis. This is very responsible lending.” Prospective borrowers are also required to take a homeownership course.

The pilot program was announced by Lennar on September 26. The pilot program is scheduled to end after 200 homes are sold by each participating builder or by December 2018. At that time, Fannie Mae will review the results and decide on next steps.

Over the last decade, U.S. college-loan balances have reached an all-time high of $1.4 trillion, according to Experian, with an average outstanding balance of about $34,000. A study by the National Association of Realtors and American Student Assistance shows student loan debt is delaying home purchases by seven years.

Additional information on our Single-Family business can be found on our website. If you have affordable lending ideas you would like to share with Fannie Mae, contact your Customer Delivery Team.

 

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