Fannie Changes....AGAIN

Fannie Mae continues to tightening the noose around the mortgage lending market. While many lenders such as Countrywide and IndyMac are stating they want to write more conservative loans that meet Fannie and Freddie guidelines, Fannie Mae counters by changing and making sure that LESS people will be able to get a conventional financed loan.

Just last week, I detailed how a borrower who was pre-approved 6 months ago that now has a better credit score and $6 more per hour was turned down for a mortgage last week because of the changes that Fannie had made to their Flex products.

Now today Fannie Mae put out a lender announcement titled, "New Flow Business Pricing Requirements". So what the heck does that mean? Big changes to how the average loan for the average borrower is going to be priced. And it won't be less.

Starting March 1, 2008 a person that has a loan to value of over 70%, meaning less than 30% equity in the home) will have pricing adjustments if their credit scores fall into certain ranges. These adjustments start with credit score of 680 and less.

First, the average credit score in the country is between 660 and 679...so the average borrower will automatically have an adjustment to their interest rate unless they have lots of equity (not likely in declining markets) or do a 15 year mortgage or less (hope you like those higher payments).

How much can this affect the rate...expect to see the rates go up by .125 - .5% depending on the scores.

What really irritates me about this change is that pricing is solely based on credit scores. There are just so many issues that can arise that are outside of the individuals control that can affect the score. Divorce, sickness, death, mistakes on the report, can all have a material impact on the overall score. There are people who have never had a late payment in their life who have credit scores in the 660-679 range because A) They may carry higher debt loads or B) just might not have a long history of making payments. My opinion is that this change just sucks.

Be sure that Freddie will not be far behind in making changes to how they will price their loans too. Hopefully, it is not quite so arbitrary or idiotic.

It also makes me concerned that the PMI companies will also follow suit. Most PMI companies price the premiums solely off the credit score already, but knowing that Fannie is charging more gives the PMI companies free reign to do the same.

These changes make the modernizing of FHA lending all that more important. If these tightening measures continue, many well qualified borrowers will be turned away or pay well more than what they should be charged.

If you are looking at refinancing, look at doing it soon. It won't matter what the Fed does with the rates. It will just allow Fannie and Freddie to charge more.