Great News For Fannie & Freddie...Almost

Finally, Fannie and Freddie have been cleared to open up their coffers, reduce the amount of reserves they need to carry and able to invest in more expensive mortgages in high cost areas. This is great news. Now the biggest and second largest mortgage investors in the country can really put more people into homes. Right? By the news releases and market responses you sure would think so.

But not so fast there my friend. Fannie and Freddie have been increasing their market share since the market truly started to melt down in August of last year. Many large mortgage lenders are only dealing with these two companies. Gaining market share isn't a problem in this environment. Gaining the ability to possibly finance more properties at higher dollar amounts isn't really that big of news. It helps in limited market areas, not all high cost areas.

But here is the thing. Fannie and Freddie have changed their guidelines to make it, A) more expensive and B) more difficult to finance a home through their programs. Both companies had released late last year that they were going to base rate calculations on credit scoring. That went into effect March 1. On March 17, the two released new pricing guidelines that go in effect June 1st. Guess what...it isn't going to be cheaper. Fannie Mae also announced that they are going to be changing DU (their underwriting software) and increasing credit requirements.

While this is going to make it more expensive for the average credit individual, you will still be able to help a vast majority of your borrowers, just maybe not at the most attractive rates. But then there is the issues of the PMI companies.

Not familiar with PMI (Private Mortgage Insurance)? Consider it default insure that your lender put into your payment if you have less than 20% down payment or equity in your property. You pay the premiums in your monthly mortgage payment. If you default on your loan, these insurance companies pay a portion of the loan to the lender.

What is the big deal? If you have less than 20% down or equity in your home and want to do a Fannie or Freddie loan...normally PMI is required. For the last few years lender would do "piggyback loans" to avoid PMI by doing 2 mortgages to finance your home. That has gone by the wayside. Most lenders want the protection that PMI offers in this market. If you want to do a loan with less than 20% equity, you have to be able to obtain PMI if you are going to do a Fannie or Freddie loan.

Most PMI companies have their own guidelines, separate from Fannie and Freddie. They have really dropped the hammer. Want to do a mortgage with less than 5% down? Better have a 680 credit score or better. Want to do any more with PMI, better have a score of 620 or better. If you are in a declining market, you cannot do a cash out refinance to consolidate debt such as combing a 1st and 2nd mortgage.

Those are just a few examples that I see with my PMI company. These are more lax for me since I work for a credit union compared to a banker or mortgage lender, their guidelines are even more harsh. The box to fit loans are getting smaller and smaller.

Oh yeah, and the modernization of FHA? The suggestion this week is to RAISE the down payment/contribution requirement to 3.5% from 3%...not lowering the requirement that has been talked about for months.

Have you seen the Wachovia mortgage commercial yet? I'll talk about it next time.

Fannie Follies Continues

You would think that a company that has had accounting problems in the last few years, restating billions of dollars over a number of years, would be especially careful when they finally started reporting again right? And this would go double for a company that is a government sponsored enterprise that is highly regulated. Triple for a company that is in the middle of a housing crisis not seen since the early 1990's. I'm right...right?

Not right. Not even close.

Fannie Mae's stock (FNM) is at decade lows, partly after an article in Fortune magazine stated concerns that Fannie Mae was "camouflaging" loan losses. Fannie Mae called an emergency conference call to discuss their "technical accounting questions". Let's just say the call didn't go very well when investors openly questioned the company's executives about being truthful.

Now, I think most of this is overblown. But let's just say accounting isn't my strong suit. I do believe Fannie Mae is not trying to pull the wool over anyone's eyes. If there was a time to report significant losses, it would be now. Even for Fannie or Freddie who are supposed to be limited to exposure to most of these issues, write downs are expected. Fannie did write down and questions surfaced that it should be more.

I don't know what the real answer is. But it would be good for Fannie to be fully truthful in all it's dealings with investors, the government, and the public in general.

With all the changes happening, specifically at Fannie in regards to changing the rules regarding underwriting of their loans and now this...it's definitely not all rainbows and butterflies for Fannie. Which is really, really scary.

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.

How Fannie Mae Has Changed

Fannie Mae has always stated that they are all about promoting home ownership. But what I find strange is that for a company that is wanting to raise it's cap to be able to invest in more mortgages, they are certainly tightening the reins on their products.

Fannie Mae has touted the Home Stay initiative, even in statements to Congress. They claim that they have written 40,000 ARMs into prime loans using this program.

Fannie provides this information regarding the Home Stay Initiative

Point one discusses EA loans. EA stands for, "Expanded Approval". These loans are approvable loans, with higher interest rates. So a borrower may receive an Approve (best rate) or any of the three EA levels (each level higher means a higher rate) and still get the loan.

The second point discusses the Flex Products which allow higher loan to value purchases (low to no down payment) and what is called limited cash out refinance loans (balance of mortgage owed plus closing costs). The key is that they will continue to offer these loans to borrowers with good credit.

Now here is where it gets tricky. As of October 22, Fannie discontinued offering EA level II and III on 100% LTV refinances and purchases. And discontinued EA III pricing on 97% LTV loans. See a slight contradiction here? They say they want to help, while at the same time, cut the loan offerings to the very people that need it most.

Want a real life example? I had a member come in Friday and reapply with me. He had put an application in with me in April and was approved at 100% financing at an EA level III. He did not have bad credit, he had a limited history and his debt to income ratio was in the low 50's. He wasn't the best borrower in the world, but he really just didn't have the history to give a better rate to at that time. His pre-approval had expired and had finally found a home he was interested in purchasing. We did the application again.

He had continued paying his one credit line on time, so his credit score had improved by 20 points. And the job he was at, his pay was based on time at the job. He had just started in April as an apprentice. He had graduated and now made $6 per hour more than what he did six months ago. His debt to income ratio was now in the low 30's.

But when I ran the loan through, the findings came back as an EA-II loan, which for 100% financing was now ineligible for delivery to Fannie Mae. Let me rephrase this, a person who was approved 6 months ago and now had a better credit score and income, was now being denied.

He was shocked. I was embarrassed to have to give him the news. My underwriters wouldn't listen to my requests. I was given the answer, have him put 3% down and we can do the loan. My member didn't have 3% to put down or able to get a gift. He was shocked. I was embarrassed to have to give him the news.