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 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.