Mortgage Loans: Fannie Mae Squeezes Mortgage Standards

Home Buyers and Refinance: US Home buyers and refinance applicants will soon find mortgages harder to set

Fannie Mae gets tough with Home Loan Borrowers and Mortgage Lenders 

Fannie Mae is the largest source of money for the U.S mortgage industry and has warned mortgage lenders it will be raising some of its qualification standards for people buying homes, whether first homes or second home buyers, and also for those seeking mortgage refinance.

The changes to Fannie Mae Mortgage standards include lowering Loan to Value Ratios 

In the past mortgage borrowers could buy homes with no money down in some cases, but typically a 3% deposit [down payment] would get home buyers over the line.
Starting from October 2012, the changes to lowering loan to value ratios for some adjustable-rate mortgages to 90 percent, down from a maximum of 97 percent.
Mortgage applicants also require a better credit history than previously, with an increased credit scores requirements for certain loans.

Low doc home loans for the self employed tightened 

Fannie Mae also will start demanding more tax returns from self-employed borrowers. Many are expecting that many borrowers in self employment will suddenly find many mortgage avenues closed to them, and this may make some homes harder to sell.

Tougher Guidelines for Mortgage lenders 

Fannie Mae (FNMA) and its smaller Government Sponsored Enterprise mortgage intermediary Freddie Mac, guarantees mortgage-backed securities financing of two-thirds of all new loans, so more misery for the housing market is likely to continue for some time
Fannie Mae told mortgage lenders that the adjustments were part of regular reviews of data and loan performance.

Stricter Reporting standards

Both Fannie Mae and Freddie Mac will need to provide annual reports on actions they are taking “to reduce taxpayer exposure to mortgage credit risk.” The requirement is part of changes to the companies’ bailouts agreements the Treasury Department last week.

Credit Scores and Credit history

Fannie Mae’s tightened standards include an increase of minimum credit scores for adjustable-rate mortgages needing to be at least 640, up from a previous minimum of 620, [on a scale ranging from 300 to 850, with 850 being clear credit], and removing flexibility to move on this with mitigating circumstances. 

The concept of benchmarking will also be eliminated. 

Instead, 36 percent will be the “stated maximum,” [This ratio can be as high as 45 percent if the borrowers meet credit score or cash reserve thresholds.] This “provides more transparent requirements with regard to how compensating factors must be applied,” 

Borrowers without credit histories will only be able to apply for single family homes they intend to live in [owner occupied].

Appraisals to be more thorough

Fannie Mae will now require a full inspection to appraise the value of the property. [No more drive by, or kerb-side appraisals will be accepted.
Sworn Appraisals will mean valuers will be liable for overstating values and this has also been a problem in Australia in the past. 

Duplex dwellings are the exception

An exception to loan tightening is duplex dwelling unit blocks upping LVR to 85% Fannie Mae is loosening some standards with the loan-to-value ratio allowed for some fixed-rate loans on two-unit properties will increase to 85 percent, from 80 percent. Down payment requirements [deposits] also will fall for certain co-op loans. It is obvious where people buy a duplex home and rent one unit out, that these people will have fewer problems in repaying the mortgage.

Australia is watching these mortgage tightening

These developments are being watched in Australia, with several similar recommendations being made by the RBA and other Peak finance groups concerning Low doc loans and Loan to value ratios and even interest only home loans.

Mr Mortgage

Commbank says no to mortgage interest rate cut

The Commonwealth Bank's chief executive Ian Narev has ruled out a rate cut independent of the Reserve Bank in the short-term.

The major banks have increased mortgage rates relative to the Reserve Bank's cash rate since the onset of the financial crisis, by lifting rates when the Reserve has kept them on hold, increasing them by more than the RBA's cash rate rises, or not passing on the same percentage point reduction as the RBA when official rates have fallen.

Westpac's chief executive Gail Kelly and Mr Narev had both intimated previously that their banks will eventually reduce their mortgage rates relative to the cash rate as funding costs ease.

However, speaking to AM, Mr Narev says funding costs remain high, meaning that a potential home loan rate reduction relative to the Reserve Bank's cash rate will have to wait.

"You've got to bear in mind that what puts pressure on our wholesale funding is the cost of new funding relative to the cost of the funding it replaced, which isn't usually funding from a month ago, it's funding from two or three years ago, and that continues to go up," he said.

"The other factor we've got here is that deposit competition is increasing and, as I said before, depositors do well, but that does continue to put pressure on our deposit pricing so, as we sit today, unfortunately we're not at the end of a cycle where funding costs are going up."

Ian Narev says that situation is unlikely to change in the short-term while volatility and uncertainty about Europe's economic future reigns.

"We think there must be a solution, it involves greater integration, but we can't see how that solution's going to be workable politically and I continue to hold that view today. And I don't think that uncertainty's a good thing for the global economy or indeed the economy here in Australia," he observed.

"So, we don't foresee a big disaster in Europe, although that is a possibility, but at the same time we can't really see yet what the catalyst is going to be for a significant improvement."

However, despite the prospect of mortgage rates remaining high relative to the cash rate and the bank's record $7.1 billion profit, CBA's chief has brushed aside calls for a another banking enquiry.

"We do think it's a very competitive banking system, so I don't think you need an enquiry to tell as that. And indeed we've had various versions of enquiries trying to get at that and, I think what I've said before on the impact on margin shows that it is competitive," he added.
"But there are legitimate questions about Australia's long-term funding that need public debate and, if the way to do that is through an enquiry, then we would be happy to participate in that."

Source: Mr Mortgage