Is there credit available out there or not? There’s lots of anecdotal accounts of no credit on the street yet banks swear they have money and are lending it. The truth lies somewhere in between, particularly for home loans.
There is money out there. The banks are equipped with plenty of money to loan but the backlash from the credit crisis and massive write-downs has caused, what some call, an overreaction towards risk avoidance. Lenders are taking few chances these days on the loans they make. Easy to understand but hard to accept for those not on the A-list for home mortgages. The cost of obtaining a mortgage is going up as well.
The home loan food chain is divided up basically into two camps – the A-list and the D-list:
A-List – If you want to get a home loan or refinance and have the following set of characteristics you are golden with Fannie and Freddie and as of today, will enjoy an interest rate of just under 5% for a 30-year fixed.
Check list for A-List: Conforming loan amount, excellent credit, secure employment or income, at least 25% downpayment and you are borrowing against a single-family house in a good neighborhood with limited foreclosures.
D-List - The D-List is everybody else. The players listed here are not in any particular order on the lender avoid-o-meter:
Jumbo Loans - Standard & Poor's recently downgraded prime jumbo mortgage-backed securities issued in 2006 and 2007 with loss projections increased from 30% to 40%. That renders the securities as good as pariahs on the secondary markets, which means that a bank issuing a jumbo mortgage will likely be unable to sell it. When you can find a lender willing to make a jumbo loan, the interest rate can range from 6 to 8% with a large downpayment. Ergo – the D-List.
Second Homes – New reserve requirements from Fannie Mae. Click here for some details, then get a good loan officer. Expect stricter underwriting and larger equity requirements than ever before.
Investors – “Fannie Mae is committed to providing financing opportunities for high-credit quality, bona fide investors. Experienced investors play a key role in the housing recovery and Fannie Mae’s continued support for investor borrowers is consistent with its mission to provide stability.” Sounds good. Click here for info from Fannie’s mouth. Just don’t expect last generation terms.
Condo Loans – That’s the topic of the day and the cause for severe heartburn in condominium developers. I’ll get to this in depth in tomorrow's post. With new regulations going into play on March 1, 2009, obtaining a condo loan will become, in most cases much more complicated and more expensive. If you take a condo loan and add jumbo, second home or investor needs, you have just been placed in ready position to have your loan application thrown into the recycle bin.
Fannie Mae will not take delivery of jumbo loans, but the rest of the players from the D-List, if within conforming loan limits, are subject to the Loan-to-Value/Credit-Score and other matrix that computes a plethora of possible additional loan fees based on assessed risk. Fannie calls these fees "loan level pricing adjustments" (LLPAs) See the sample charts at the end of post or click here.
First, a little history please to explain the reasoning behind the LLPAs. Fannie and Freddie were battered by the worst wave of mortgage defaults since the 1930s and recorded combined losses of nearly $60 billion for 2008 compared with a year-earlier loss of $2.1 billion. The loss for 2008 exceeds net income for the preceding 17 years. And they don’t see things getting any better expecting losses to worsen in 2009.
The government took control under conservatorship, which means the regulator, or government, is charged with "conserving" the companies' operations and nursing them back to financial health.
While legislators struggled to find ways to stimulate the economy and save the drowning housing market, the news that stricter credit requirements and higher fees could not have been timed worse. Effective April 1, 2009, Fannie Mae and Freddie Mac are increasing their mandatory fees and toughening their credit score and down payment rules.
Under FNMA and FMAC’s revised guidelines, even applicants who assumed that their previously considered “decent” credit scores would get them favorable rates will be charged more unless they can come up with down payments of 30% or higher. What does this mean? As an example, a potential home buyer with a FICO score a few points shy of 700, who can afford down payment of up to 25%, will now be charged 1.5% “delivery fee” at closing under the new guidelines.
The justification for the changes, according to Freddie spokesman Brad German, is that “some of the loan categories and credit risk combinations targeted in the latest round of fees default at four to eight times the rate of other mortgages in the company’s portfolio.” Due to their higher probably of loss, it’s a form of risk management. But unfortunately, these changes come at a most inopportune time as potential homeowners are already struggling to find ways to qualify for new or refinanced mortgages.
The new guidelines will re-set the standard for what used to be considered a guarantee for obtaining the optimum rates. An individual without the minimum downpayment who’s FICO score falls in the 700-720 range will now automatically have an extra three-quarters of a point tacked on. And those with FICOs in the mid 700’s, previously considered stellar, will now be rewarded with a quarter-point add-on. Bloomberg
Fannie’s pay-to-play, risk-based LLPAs, went into effect April, 2008 based on credit scores and equity percentage. The new Fannie Mae guidelines that go into effect April of 2009 put three other loan characteristics into the equation: condo and co-op mortgages, interest only mortgages, and mortgages under 75% LTV with subordinate financing.
Fannie Mae's latest announcement is its fifth risk-based pricing update in the last 15 months. It is not likely to be the last as the cost to obtain mortgage financing continues to rise.
Think of the Fannie risk-based pricing model for loans as similar to how auto insurance is priced. Where the cost of the policy increases as a driver’s perceived risk to the insurance company increases. A “safe” driver will be rewarded with lower premiums. The same methodology applies to LLPAs; Fannie Mae is charging what they consider high risk with the highest mortgage costs.
Fannie's new pricing requirements for mortgage loans with certain "risk characteristics" will be effective April 1, 2009. The following summarizes the updated and new loan-level price adjustments, LLPAs):
- a number of loan-to-value (LTV) ratios combined with certain representative credit scores,
- certain cash-out refinance transactions,
- mortgage loans secured by two-unit properties, and
- mortgage loans with subordinate financing.
New LLPAs will apply to mortgage loans with an interest-only feature, and mortgage loans secured by condominium and cooperative properties. It is the subject of the condo loans that I'll talk about in tomorrow's post.
Below are two of the LLPA charts that calculate the Fannie Mae mortgage fees. Click here to see more.