Fannie Mae Tightens Guidelines On ARMs And Interest Only Products

For the first time this year, Fannie Mae announced significant updates to its mortgage underwriting guidelines.
The changes include newer, harsher ARM qualification standards, the elimination of a once-popular loan product, and tighter rules for interest only mortgages.
Fannie Mae made its official announcement April 30, 2010.  The changes will roll out to home buyers and homeowners in Philadelphia and everywhere else over the next 12 weeks.
The first guideline change is tied to ARMs of 5 years or less.
Mortgage applicants must now qualify based on a mortgage rate 2% higher than their note rate.  For example, if your mortgage rate is 5 percent, for qualification purposes, your rate would be 7 percent.
The elevated qualification payment will disqualify borrowers whose debt-to-income levels are borderline.
The second change is Fannie Mae's elimination of the standard 7-year balloon mortgage.  Balloon mortgages were popular early last decade.  Lately, few borrowers have chosen them, though.  Mostly because rates have been relative high as compared to a comparable 7-year ARM.
And, lastly, Fannie Mae is changing its interest only mortgages guidelines.
Effective June 19, 2010, Fannie Mae interest only mortgages must meet the following criteria:

1. The home must be a 1-unit property
2. The home must be a primary residence, or vacation home
3. The borrower's FICO must be 720 or higher
4. The mortgage must be a purchase, or rate-and-term refinance. No "cash out" allowed.

Furthermore, borrowers using interest only mortgages must show two full years of mortgage payments "in the bank" at the time of closing.
Earlier this year, Fannie Mae-sister Freddie Mac announced that as of September 2010, it will stop offering interest only loans altogether.
Between Fannie Mae, Freddie Mac, the FHA, and other government-supported entities, the U.S. government now backs 96.5% of the U.S. mortgage market.  So long as mortgage default rates are high, expect approvals for all borrower types to continue to toughen.

Fannie Mae Lowers Fee, Makes Mortgages More Affordable

In an effort to provide "the most market support possible", Fannie Mae is cutting one of its mandatory loan fees by 0.250 percent, effective immediately.

Fannie Mae introduced the Adverse Market Delivery Charge in December 2007 to offset foreclosure and delinquency losses.  The initial fee was a quarter-percent of the amount borrowed. 

Then, as market conditions worsened, Fannie Mae doubled its across-the-board loan fee to 0.500 percent in August of this year.

As of today, the fee is back to its starting point.

Since the start of the 2008, Fannie Mae has made 21 separate changes to its mortgage guidelines.  Most have been detrimental to borrowers, increasing the difficulty, or the cost, of qualifying for a conforming home loan.

Today's change is among the few that are beneficial.

With mortgage pricing edging higher because of the looming Congressional vote and Wall Street's reaction to the weak jobs report, the good news is that price changes could have been worse. 

Fannie Mae's Adverse Market Delivery Charge flip-flip is keeping rates in check -- perfect timing for home buyers shopping for their new mortgage.

Some Good News From the Falling Stock Market

Monday, the Dow Jones Industrial Average closed below the psychologically-important 10,000 level for the first time since 2004. 

Despite the milestone-marker breach, however, there was a large group of Americans with reason to cheer.  As stocks sold off, mortgage markets rallied to the benefit of home buyers everywhere. 

Conforming mortgages rates improved yesterday.

Most interesting here is that rates improved for the same reason that the stock market fell.  Because of lingering concerns about the worlds' economies, investors lost their collective appetite for risk Monday.  In response, they sold their stock positions and parked the proceeds in the "safe haven" of U.S. government-backed debt. 

The extra demand for safe investments pushed up the prices on mortgage bond which, in turn, pushed down mortgage bond rates.

Now, we can't predict when the market's risk appetite will return, but when it does, expect money to flow into stocks just as quickly as it left. 

All year long, with respect to stock markets, it's been either "everybody in" or "everybody out" and, for now, it's everybody out.  This is why mortgage rates fell Monday. 

But, when the momentum shifts -- and it will shift -- mortgage rate shoppers would do well to be prepared.  Be ready to lock that mortgage rate because as soon as the stock market reverses course, mortgage rates will head higher. 

If stocks recover as quickly as they tanked, expect mortgage rates to spike badly.

(Image courtesy: USA Today)

Getting a Break When Rates Dip

Getting a great, low mortgage rate is often a combination of luck and preparation. 

Consider what happened in conforming mortgages last week:

• Monday, mortgage rates plunged to their lowest levels of the year
• Tuesday, they bounced back in full
• Wednesday, they clicked higher by a eighth-percent
• Thursday, they clicked higher by another eighth-percent

And so, here we on are Friday, four days after the best rates of the year, and the mortgage market barely resembles itself.  Despite what the papers tell you, mortgage rates are not low anymore.

That's the luck element -- you can't plan for rates moving up and down.

But, if you missed Monday's plunge, and don't want to miss the next one, all you have to do is get prepared.  Then, you're waiting for luck when it happens.

There are 4 basic steps to prepare for low rates and the key is to follow them before rates plunge, not during.  That way, you're ready to pounce on low rates at the moment they present themselves.

The first step is to contact your loan officer. 

If you don't have a loan officer, or your loan officer is no longer in the business, ask a friend for a referral.  Do not call the 800-number on your mortgage statement -- you'll almost always get a better "offer" from a live person than from a call center representative. 

Next, give your loan officer a complete mortgage application, including a "credit pull".  Be honest and accurate and don't worry about the credit check harming your score -- the bureaus protect it for a period of 30 days.

Then, ask your loan officer what supporting documentation will be required to approve your eventual home loan.  Whatever it is, gather it and send it in -- either by fax or email.

And lastly, be ready to act when your loan officer calls with the good news. If rates have dipped to lower-than-normal levels, it likely won't last long.

This preparation process is very similar to what home buyers do before making an offer on a home.  Getting ready for a refinance is like getting pre-approved, but instead of waiting to pick out a home, it's waiting to pick out a rate.  

So, to summarize:

1. Contact your loan officer
2. Give a complete application
3. Gather and submit supporting documentation
4. Be ready to act

Mortgage rates don't plunge often, but when they do, it's usually short-lived.  If you're prepared for when it happens, you can lock in the best mortgage rate available at the best possible time.

It will be your lucky day and you will have been ready for it.

Picking the Right Mortgage Payback Period?

On all principal + interest home loans, the first few years of payments include a lot more money going to interest than to principal. 

This is because mortgage repayment schedules are front-loaded with interest, meaning large-volume principal reduction won't occur until late in the mortgage's lifecycle.

Comparing products at a 6% mortgage rate, did you know that after 15 years:

• A 15-year mortgage will be paid in full
• A 20-year mortgage will have 41.21% of its loan balance remaining
• A 30-year mortgage will have 73.19% of its loan balance remaining

Of course, this doesn't mean that 15-year mortgages are better than their 20-year or 30-year brethren.  It just means that 15-year mortgages pay off faster. 

Yet, there are reasons for homeowners to avoid 15-year mortgages. 

For example, versus 20-year or 30-year products, 15-year mortgages require the highest monthly payment because the payback period is compressed to a shorter time.  In addition, mortgage interest tax deductions to which most homeowners are entitled are reduced.

So, just because the 15-year pays off quickly doesn't mean that it's best for everyone.

Who Benefited From Falling Stocks

Yesterday, the stock market suffered its largest one-day point loss since September 17, 2001, and its sixth-largest point loss in history.

Not everyone got punished, however. Two groups of people, in particular, welcomed yesterday's losses:

1. Home buyers out shopping for a mortgage


2. Homeowners that snoozed through last week's mortgage rate drop

See, as the stock market dropped yesterday, investors anxiously moved their money away from risky investments like stocks and into the safe haven of government-backed debt.

This includes mortgage-backed debt, of course.

As traders poured into bonds, bond prices rose. They did so beginning at Market Open, all the way into Market Close. And, because mortgage rates move in the opposite direction of mortgage bonds prices, mortgage rates fell Monday. A lot.

Today, the Federal Open Market Committee meets, adjourning from its scheduled conference at 2:15 P.M. ET. In the Fed's press release, among other things, markets expect Ben Bernanke & Co. to address the financial system's stability -- or lack thereof -- that helped to fuel Monday's selling action.

If markets find the Fed sympathetic, expect stock markets to rally, and mortgage rates to rise.

Investor face New Lending Limits

In its last act as a semi-independent company, Fannie Mae altered mortgage guidelines for real estate investors last Friday. It was Fannie's 22nd update this year.

The first part of the guideline change limits the number of properties owned by any one person. 

Fannie Mae will now decline any mortgage application for a second home or investment property if the mortgage applicant already finances, or will finance, more than 4 properties in total.

The former guidelines allowed for 10.

There is a loophole, however.  Fannie Mae will not count properties against the 4-property limit if they are held in the name of a corporation.  This holds even if the real estate investor is the sole owner of said corporation. 

Investors, therefore, should consider moving their properties into a corporate structure to avoid triggering Fannie Mae's 4-property limit.  Many take this step for liability and taxation reasons, but it's now a good idea for mortgage approval reasons, too.

The second part of the guideline change cannot be so easily avoided.  Fannie Mae is assessing new, loan-to-value based loan fees on all investment property mortgages.

• Loan-to-value less than 75 percent : 1.75% loan fee
  
• Loan-to-value 75.01-80.00 percent : 3.00% loan fee
  
• Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These fees are mandatory and are in addition to any whatever other risk-based loan fees Fannie Mae may assess.  Currently, those fees amount to a half-percent at minimum for real estate investors.

Since its Fannie/Freddie takeover, government officials have not addressed whether mortgage guidelines will be rolled back to "a looser time".   If they are, it would be a big deal for real estate investors because, as many are finding out, low rates don't matter much if you can't qualify for them.

If you're currently in the market for an investment property (or two), consider that it may be cheaper and simpler to purchase over the near-term versus the long-term.  And consider moving your existing properties into a corporate structure first.

How The Government Take Over of Fannie Mae and Freddie Mac lowered Mortgage Rates

When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return.

This behavior is called Risk Aversion and is a basic tenet of personal investing.

An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too.

The chart at right illustrates this concept, comparing return rates on two investments:

• U.S. Government bonds
  
• Mortgage-backed bonds

The difference in investment return rates is sometimes called a "spread" and the historical spread between government debt and mortgage debt is somewhere near 1.5 percent. 

However, notice how the spread started to grow starting in July 2007.

July 2007 marked the "official" start of the Credit Crunch and as mortgage delinquencies grew nationwide, so did the market's perceived risk of investing in them. 

By the start of this month, the spread had nearly doubled.

But that all changed Sunday.  When the government announced its takeover of Fannie Mae and Freddie Mac, it put the same "risk-free guarantee" on mortgage debt that has helped keep U.S. government debt so cheap to finance and the spread immediately shrunk.

This is one reason why mortgage rates fell Monday and why they should continue to stay low over the near-term.  With the U.S. government backing the mortgage market, there's no room for the risk premium that helped keep rates high this past year.

It doesn't mean more people will qualify for conforming home loans, but for the ones that do, financing should be cheaper.

Mortgages Rates Benefit from Unemployment Data

On the first Friday of every month, the government releases its Non-Farm Payrolls report.

More commonly called the "jobs report", the two-page analysis examines the nooks and crannies of the U.S. economy to see which industries are hiring and which are firing.

The August jobs report was released last Friday and it shows that the U.S. economy shed 81,000 jobs in August.

This marks the eighth straight month in which payrolls declined and puts the annual job loss total at 605,000. The Unemployment Rate jumped to 6.1% -- its highest level in 5 years.

For American workers, this is bad news. But, for American home buyers, the news couldn't be better.

Mortgage rates are improved this morning on the weak jobs data.

If this seems counter-intuitive, remember that earlier this year, lingering concerns about inflation in the U.S. economy caused mortgage rates to rise to their highest levels in more than 5 years.

Lately, however, those fears are subsiding and as today's jobs report shows worse-than-expected weakness, it's one more reason for markets to put inflation concerns to rest. With fewer Americans working, there are fewer dollars are available to propel the economy forward, after all.

So, today's jobs data is good for mortgage rates because it reduces inflationary pressures on the economy and as inflation levels fall, mortgage rates tend to do the same.

Lower rates mean more affordable housing payments each month.

(Image courtesy: USA Today, The Wall Street Journal)

If You Want Change You Need to do Stuff!

New quote of the day "If you're afraid of being criticized, Say nothing, Do nothing, Be Nothing!'

Just got that from a friend on the Interpretations and Procedures Subcommittee of NAR's Professional Standards Committee. She said she got it from her Grampa - I think Grampa was a pretty smart guy -

Today the Federal Government moved into a conservator position with Fannie Mae and Freddie Mac. While I'm not sure how that will affect the mortgage market, the fact that they have thrown the full strength of the government into supporting the housing market is encouraging.

Now we need to wait and see what happens.

Watch the Weather Impact Mortgage Rates

Three years to the week after Hurricane Katrina caused $81.2 million in damages, Tropical Storm Gustav is charting a similar Gulf of Mexico path.

Memories of Katrina are making oil traders nervous.  The 2005 storm shut down 30 platforms and 9 refineries.  And, this week, oil prices are up nearly 4 percent on fears that the market, once again, may be disrupted by storm. 

Mortgage rates are edging higher on the news.

The link between oil prices and mortgage rates is not a direct one, but it's worth paying attention to. 

Rising oil prices strain business and consumer budgets, creating inflationary pressures on the economy.  And at no time was this relationship more evident than in May and June of this year.  As oil prices reached new, all-time highs almost daily, Americans felt the impact each time they opened their wallets -- the Cost of Living inflation gauge reached a 17-year high in July 2008.

Inflation is the enemy of mortgage rates so as inflation rises, mortgage rates tend to rise, too. 

And this is one reason why mortgage rates are ticking higher this morning -- there is an overriding fear that Gustav will strengthen into a full-fledged Hurricane before making landfall, causing damage to oil refineries and shipping ports around the Gulf of Mexico.

Damage reduces oil supplies and that causes oil prices to rise.  It's basic supply and demand.

Gustav is expected to make landfall Monday or Tuesday.  If the storm continues on its path, we may see mortgage rates continue to trend higher.  If the storm dissipates, rates should reverse.

Fannie Mae Fees May Increase Buyer Costs

Fannie Mae announced a new risk-based pricing model and additional mortgage delivery fees this week, adding to the cost of buying a home.

Risk-based pricing was first introduced by Fannie Mae this past April. It added new, mandatory loan fees for high-risk borrowers while rewarding a small group of low-risk borrowers with fee credits.

In the updated model, even 720 credit scores with a 20 percent downpayment won't protect mortgage applicants from the risk-based fees and they can range as high as 2.750 percent, depending on credit scores and downpayment size. 

Fannie Mae will continue the practice of rewarding high-downpayment borrowers with fee credits.

Fannie Mae's second pricing change involves the Adverse Market Delivery Charge and it is not risk-based -- it applies to all applicants equally. 

First introduced in December 2007, Adverse Market Delivery Charges are mandatory surcharges on all conforming mortgages.  The fee was initially a quarter-percent.  It's now doubled to 0.500 percent.

Combining risk-based pricing and delivery fees, mortgage applicants have two choices to pay them:

1. As a one-time fee, paid at closing, payable to the lender
   
2. As an interest rate increase, payable month-after-month to the lender

The one-time fee is calculated by multiplying to fee amount by the applicant's loan size and dividing by 100.  The interest rate increase is calculated as a general rule, where each 0.500 percent in fees can be substituted for a 0.125 percent increase to a mortgage rate.

The fees become "official" October 1, 2008, but lenders are expected to deploy them much sooner.

Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.

Effective today, the rule book just got a little bit tougher.

According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.

The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.

Second Home Guideline Changes

• Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.
• With 30 percent equity, the PITI reserve can be reduced to 2 months.

Previously, there was no minimum reserve requirement. Now, a second home buyer needs to know that they can carry that property for a period of time with their current savings.

Investment Property Guideline Changes

• With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant's monthly household income.
• Without 30 percent equity, rental income may not be applied to the applicant's monthly household income and 6 months PITI is required for both properties.

Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months. Due to the number of "investors" who bought property without equity, and then walked away from the properties when they were unable to rent them, some method of involving the investor in the success and failure of the investment was sought.

Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.

This is because more restrictive guidelines lead to two separate, but concurrent, outcomes:

1. The demand for homes reduces because fewer buyers qualify for mortgages
2. The supply of homes increases because fewer sellers can refinance into more affordable home loan

Less demand and more supply places downward pressure on home prices.

Now, remember that mortgage guidelines continuously evolve and what's accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you're reading about mortgages online with your loan officer before making any real estate-related decisions.