From Mortgage Mania to Credit Crunch: Part IV
From Mortgage Mania to Credit Crunch: Part IV
Credit to Rachel Van Emon for this article.
The changes to guidelines are here. Fannie Mae has set a date to begin implementing new policy and guidelines for approving conforming loans. The rest of the nation is likely to follow. Here’s why.
Fannie Mae and Freddie Mac purchase loans up to the conforming loan limit (currently $417,000). In order to sell a loan to Fannie Mae, banks are required to use their Desktop Underwriting System (DU) to process and approve the loan. Changes in policy and guidelines by Fannie Mae are implemented nationwide by updating the DU system.
What is not widely known is that jumbo loan lenders use DU guidelines as their starting point for loan policies and guidelines. Fannie Mae and Freddie Mac set the fundamental guides from which everyone else, even the jumbo lenders, write their specific guides.
When there are universal changes to the way Fannie Mae underwrites a loan, these changes typically flow out to the banks and to jumbo lenders and are adopted sooner or later by most everyone.
Here is the news we just received from Fannie Mae:
Effective July 22, 2007, for all loans originated with an IO feature…DU Version 5.7 will use the payments as described below in is risk assessment:
· Interest Only Fixed Rate Mortgage: PITI based on the full principal and interest payment at the note rate, in addition to the taxes and insurance payments, amortized over the full repayment term
· Interest Only Adjustable Rate Mortgage: PITI based on the full principal and interest payment at the fully indexed rate (index + margin), in addition to the taxes and insurance payments, amortized over the full repayment term
What will this mean?
1. Buyers will qualify for smaller loan amounts after this takes effect than they would have before its implementation.
2. It will be more stringent to qualify for an Adjustable Rate Mortgage than a Fixed Rate Mortgage. Fixed mortgage note rates are currently in the range of 6.625-6.875%. This is the rate that is used for qualifying. A 10-year ARM might have a note rate of 6.5%, but a fully indexed rate of 7.645% (The 1 yr LIBOR index is 5.4 + margin of 2.25). Whatever the start rate on this ARM, the fully indexed rate will be used for qualifying.
3. Buyers will qualify for less loan amount which will require a larger amount of down payment or they will need to consider lesser priced homes.
4. Banks may raise their debt to income limits to minimize the impact on buyers.
5. Home sellers will be offering concessions to help buyers with closing costs to free up the buyer’s cash to pay off debts or put more down payment.
6. Lenders and homebuyers will be working closely together to document as much income as possible, to pay off debts to qualify and to structure the deal so it is most advantageous on the financial side of the transaction.
Actions that Realtors® and Mortgage Advisors can do now:
1) Confirm that all of your clients pre-approvals are still valid. You don’t want to get into contract only to find out the financing is no longer possible. A pre-approval letter does not ensure the loan program will still be available to that borrower.
2) Encourage clients to act now if they believe that they will not be able to qualify for the same level of financing later. The client’s situation should be reviewed again by an underwriter using the new guidelines. If they cannot, then they may consider buying before the changes are implemented.
