Fannie and Freddie Fan the Flames

This is our third article reviewing the changes to loan policies being initiated by Fannie Mae and Freddie Mac. It is obvious that these organizations have progressively expanded their use of risk based pricing to mitigate their exposure to further losses. Initially, Fannie Mae required Lenders to strengthen their guidelines for appraisers to follow in establishing a market value for a property. Failure to meet certain minimum requirements in completing the appraisal could result in delays in getting a loan approved, increases in the amount of down payment required of the buyer or outright rejection of the loan.

Subsequently, Fannie Mae instituted a “soft market policy” that “penalized” properties located in certain markets across the U.S., by requiring Loan-to-Value (LTV) reductions (in most cases) if that market was determined to be a high risk market. One Lender that we are aware of designated the entire State of Florida as a high risk State, subject to potential LTV reductions; another Lender designated risk at the zip code level. The implications of these changes were to effectively change the rules of certain loan programs offered by Lenders; a 100% financing program could be limited to 95%; a 90% program could be reduced to 80%. At a minimum, these changes could increase the amount of down payment required by the borrower. It will also eliminate certain borrowers from qualifying for a mortgage if they do not have access to the required down payment.

The latest changes being implemented by Fannie Mae, effective March 1, will place additional hurdles before consumers with certain credit scores can obtain a mortgage loan. In the past, mortgage loan applicants with credit scores between 620 and 850 generally received the same interest rates on conventional loans. The new guidelines specify that a lower LTV must be met for loan applicants with credit scores between 620 and 679, or an interest rate surcharge will be added to the rate. The new LTV is 70.01%.

The interest rate surcharges are staged as follows:

Credit Score Interest Rate Surcharge
To Quoted Rate

680 to 850 no increase
660 to 679 .125% increase
640 to 659 .25% increase
629 to 649 .375% increase

The home buyer with a credit score between 620 and 679 can still qualify for a conventional loan; however, they will be required to pay a higher interest rate if they do not have equity or available funds for a higher down payment to achieve the required LTV. There are exceptions to these guidelines for FHA, VA and other loan programs specified by Fannie Mae. You need to check with your Lender or Mortgage professional to determine these exceptions.

Last week, Freddie Mac announced changes, effective June 1, to their loan policies that will place further restrictions on LTV and credit scores, which will have the effect of increasing the cost of borrowing for a greater number of loan applicants.

Our purpose here is not to question the actions being taken by Fannie Mae and Freddie Mac, but to make Real Estate and Builder Sales professionals aware of these changes. The fact is that it is getting more difficult for certain consumers to qualify for a home mortgage or refinance an existing loan. It is imperative that in order to properly service our customers, we become knowledgeable of these changes. We also need to assume that more changes will be made. Our goal is to keep you apprised of these changes as they occur.

Double Trouble

Today’s lending market is fascinating. It’s volatile, ever-changing, hard to keep up with, and even harder to understand.

Recently, I wrote an article regarding the renewed importance of an appraisal in today’s real estate environment with declining home values. This is only part of the lending puzzle.

At Fannie Mae’s direction, lenders have instituted a “soft market policy” (usually Counties) according to a risk assessment of whether that area is declining or stable from a valuation standpoint. One lender uses a system of five categories; another, a three-category system, with the highest number equating to the highest risk. Different lenders have different criteria for addressing soft markets.

The impact of the rating is that the highest risk markets can have (in some cases will have) their loan-to-value (LTV) ratio reduced. The minimum LTV reduction in the highest risk markets that we have determined, among the lenders we have surveyed, is 5%. Under these circumstances, a loan program allowing for a 95% LTV, will now have a new maximum of 90% LTV. This effectively increases the down payment requirement by 5%. On a $300,000 loan, that increases the down payment requirement by $15,000. The maximum LTV reduction that we have found is 10% LTV. FHA and VA loans are excluded from the reduction of LTV policy. However, popular first-time homebuyer programs offering 100% financing could be subject to a 5% reduction in LTV if they are located in a “high risk” market.

In my previous article, I mentioned that the appraisal criteria lenders require appraisers to follow, is of critical importance in getting the loan approved. Not only have lenders implemented more stringent requirements for appraisers to meet in establishing the value of a specific property, they have compounded the issue by setting risk criteria which could have the effect on further diluting property values.

Not all markets are categorized as soft and not all lenders categorize markets the same. Your mortgage professional has access to this information as well as lists of approved appraisers for various lenders. Going forward, the working relationship between the real estate agent, the appraiser and the mortgage broker/lender is more important than ever.