New Fannie Mae Loan Fees To Take Effect Mid-January

When conforming mortgages started defaulting en masse in late-2007, mortgage guarantor Fannie Mae created a loss-offsetting, fee-generating scheme dubbed "loan-level pricing adjustments".

The concept was basic: For mortgage applicants with high-risk profiles, collect up-front payments to offset potential long-term losses. 

Similar to the auto insurance model in which younger drivers pay higher premiums, the riskier the applicant, the higher the fee.

At the inception of the program, Fannie Mae defined "risk" as a combination of borrower credit score and home equity percentage.  In general, lower FICOs and higher LTVs paid more costs.

Effective April 1, however, Fannie Mae's definition of risk is expanded.  By a lot.  Fannie Mae's new loan-level fees now impact any conforming mortgage that meets any of the following criteria, with the exception of fixed rate loans of 15 years or less.

• Up to 0.75% fee: Secured by a condo/co-op with less than 25% equity
• Up to 0.50% fee: Features a junior mortgage (i.e. HELOC, HELOAN)
• Up to 1.00% fee: Features interest only payment options
• Up to 1.00% fee: Secured to a 2-unit property
• Up to 3.00% fee: Is designated as "cash out"

Each 1 percent in fees equals 1 percent of the borrowed amount. Therefore, a condo buyer with a $200,000 first mortgage and a $25,000 line of credit is subject to a mandatory 1.25% charge of $2,500, due at closing.

However, it doesn't stop there.  Fannie Mae has also adjusted its original FICO-LTV matrix so that nearly every applicant -- irrespective of credit score -- will face higher closing costs on their home loan.

Mortgage rates may be falling, but the cost of financing a home is rising.

Fannie Mae's latest announcement is its fifth risk-based pricing update in the last 15 months.  It's likely it won't be the last, either.  Therefore, if you're torn between to buy a home now or later, consider that the cost of waiting may outweigh the benefits of falling prices or falling rates.

Effective December 13, 2008 Some Conforming Mortgages Will Require Larger Down Payments To Get Approved

In an effort to limit risky borrower behavior, Fannie Mae announced a new round of mortgage guideline changes last week.

Unlike its previous 20-plus updates that raised income requirements and minimum credit scores (among other changes), Fannie's latest guideline tweaks focus on the value of its underlying mortgage assets -- home equity.

Effective December 13, 2008, Fannie Mae will require larger equity positions on some of its insured purchases and refinances.

A few of the updates include:
-- Limiting primary residence, cash out refinances to 85% loan-to-value
-- Requiring 10% downpayments on second/vacation homes
-- Requiring a 25% equity position on all investment property refinances

And, while the above changes represent 5 percent equity increases over the current mortgage guidelines, some of the other updates call for increases of as much as 20 percent.

As we head into the election and Congress mulls over another economic stimulus package, it's unclear if mortgage rates will move higher or lower as we close out the year. We do know, however, that getting approved for a conforming mortgage will, in general, be harder come December 13, 2008.

If you're finding yourself on the fence about your next move -- whether it's to buy or to refinance -- consider taking the necessary steps before the guidelines change.

Low, low mortgage rates don't mean much if you don't have enough home equity to get a home loan approval.

(Image courtesy: The New York Times)

Fannie Mae Halves One Of It's Mandatory Loan Fees

In an effort to provide "the most market support possible", Fannie Mae is cutting one of its mandatory loan fees by 0.250 percent, effective immediately.

Fannie Mae introduced the Adverse Market Delivery Charge in December 2007 to offset foreclosure and delinquency losses. The initial fee was a quarter-percent of the amount borrowed.

Then, as market conditions worsened, Fannie Mae doubled its across-the-board loan fee to 0.500 percent in August of this year.

As of today, the fee is back to its starting point.

Since the start of the 2008, Fannie Mae has made 21 separate changes to its mortgage guidelines. Most have been detrimental to borrowers, increasing the difficulty, or the cost, of qualifying for a conforming home loan.

Today's change is among the few that are beneficial.

This morning, mortgage pricing is edging higher because of the looming Congressional vote and Wall Street's reaction to the weak jobs report. The good news is that price changes could have been worse.

Fannie Mae's Adverse Market Delivery Charge flip-flip is keeping rates from rising as high as they might have otherwise risen today.

Looking Back And Looking Ahead: September 15, 2008

In a week overdone with market-altering news, conforming mortgage rates shed a quarter-percent overall last week. It was the third straight week in which rates improved.

The biggest story, by far, was the government's takeover of Fannie Mae and Freddie Mac.

The two quasi-government agencies were nationalized into bona fide government agencies, converted mortgage-backed debt into risk-free, government debt.

Instantly, conforming mortgage rates fell.

But, once the news settled in, mortgage markets returned to normal and, like in weeks prior, rates mirrored the path of the U.S. dollar.

Early in the week, the dollar was helped by economic trouble in Europe and optimism about the U.S. economy. Currency traders flocked to the dollar, helping to push mortgage rates down for Americans.

But, as the week continued, dollar enthusiasm waned and mortgage rates increased. Then, Friday afternoon, the dollar -- and mortgage rates -- got shellshocked by a combination of news contributed to the dollar's worst one-day decline in six months:

-- Hurricane Ike threatened oil supplies from Texas
-- Back-to-school sales were weak nationwide
-- Lehman Brothers teetered on collapse

This week, without much economic data to digest. Wall Street's attention will be focused on Tuesday's Federal Open Market Committee meeting. Ben Bernanke & Co. are widely expected to hold the Fed Funds Rate at 2.000 percent.

But, it won't be what the Fed does to the Fed Funds Rate that will be so important Tuesday. It will be what the Fed says.

If the Fed shows worry over medium- or long-term inflation in the economy, mortgage rates should rise because inflation is the enemy of the mortgage market. Sometimes, even an off-hand reference to inflation can make that happen. By contrast, if the Fed shows little concern for inflation, it may cause mortgage rates to fall.

The FOMC adjourns and issues its press release at 2:15 P.M. ET Tuesday.

(Image courtesy: The Wall Street Journal)

New Mortgage Rules Put Limits On Real Estate Investors

In its last act as a semi-independent company, Fannie Mae altered mortgage guidelines for real estate investors last Friday. It was Fannie's 22nd update this year.

The first part of the guideline change limits the number of properties owned by any one person.

Fannie Mae will now decline any mortgage application for a second home or investment property if the mortgage applicant already finances, or will finance, more than 4 properties in total.

The former guidelines allowed for 10.

There is a loophole, however. Fannie Mae will not count properties against the 4-property limit if they are held in the name of a corporation. This holds even if the real estate investor is the sole owner of said corporation.

Investors, therefore, should consider moving their properties into a corporate structure to avoid triggering Fannie Mae's 4-property limit. Investors often take this step for liability and taxation reasons, but it's now a good idea for mortgage approval reasons, too.

The second part of the guideline change cannot be so easily avoided. Fannie Mae is assessing new, loan-to-value based loan fees on all investment property mortgages.

-- Loan-to-value less than 75 percent : 1.75% loan fee
-- Loan-to-value 75.01-80.00 percent : 3.00% loan fee
-- Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These fees are mandatory and are in addition to any whatever other risk-based loan fees Fannie Mae may assess. Currently, those fees amount to a half-percent at minimum for real estate investors.

Since its Fannie/Freddie takeover, government officials have not addressed whether mortgage guidelines will be rolled back to "a looser time". If they are, it would be a big deal for real estate investors because, as many are finding out, low rates don't matter much if you can't qualify for them.

If you're currently in the market for an investment property (or two), consider that it may be cheaper and simpler to purchase over the near-term versus the long-term. And consider moving your existing properties into a corporate structure first.

Why The Government's Takeover Of Fannie Mae And Freddie Mac Is Lowering Interest Rates

When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return.

This behavior is called Risk Aversion and is a basic tenet of personal investing.

An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too.

The chart at right illustrates this concept, comparing return rates on two investments:

-- U.S. Government bonds
-- Mortgage-backed bonds

The difference in investment return rates is sometimes called a "spread" and the historical spread between government debt and mortgage debt is somewhere near 1.5 percent.

However, notice how the spread started to grow starting in July 2007.

July 2007 marked the "official" start of the Credit Crunch and as mortgage delinquencies grew nationwide, so did the market's perceived risk of investing in them.

By the start of this month, the spread had nearly doubled.

But that all changed Sunday. When the government announced its takeover of Fannie Mae and Freddie Mac, it put the same "risk-free guarantee" on mortgage debt that has helped keep U.S. government debt so cheap to finance and the spread immediately shrunk.

This is one reason why mortgage rates fell Monday and why they should continue to stay low over the near-term. With the U.S. government backing the mortgage market, there's no room for the risk premium that helped keep rates high this past year.

It doesn't mean more people will qualify for conforming home loans, but for the ones that do, financing should be cheaper.

Looking Back And Looking Ahead: September 8, 2008

Mortgage markets improved last week on Hurricane Gustav's less-than-expected damages and a strengthening U.S. dollar.

Even factoring in Friday's 0.125 percent run-up on most mortgage products, rates improved overall.

It's the second straight week in which mortgage rates improved.

But for all the news that we could dissect from last week, it should be the news from this week that proves most interesting.

This is because on Sunday, the U.S. government assumed control of Fannie Mae and Freddie Mac.

So far, the papers have done a terrific job talking about the political perspective of the takeover, and the economic perspective of the takeover, but very few have addressed the key news for homeowners -- mortgage rates are plummeting.

Mortgage rates are improved this morning because of Fannie Mae and Freddie Mac's collective role in the U.S. mortgage market.

They guarantee about half of the nation's $12.1 trillion in mortgages

They purchased and securitized four-fifths of the nation's home loans as recently as six months ago

See, earlier this year, Wall Street punished Fannie Mae and Freddie Mac for their weak balance sheets and increasing number of mortgage delinquencies. This led to Wall Street to raise the borrowing costs for the two firms across the board which, in turn, led to higher mortgage rates for Americans.

But today, with their balance sheets backed by the U.S. government, Fannie and Freddie are now viewed as "safe" by the eyes of Wall Street. Their borrowing costs have been lowered, therefore, and mortgage rates are falling in response.

This week is light on economic data but it shouldn't really matter. Mortgage rates should close the week lower than where they started for the four-fifths of the country that uses Fannie or

Freddie's conventional mortgages.

For everyone else, keep an eye on the U.S. dollar. Its strength continues to have positive consequences on the mortgage markets.

(Image courtesy: The New York Times)

Fannie Mae Increases Its Mandatory Loan Fees For All Borrowers

Fannie Mae announced a new risk-based pricing model and additional mortgage delivery fees this week, adding to the cost of buying or refinancing a home.

Risk-based pricing was first introduced by Fannie Mae this past April. It added new, mandatory loan fees for high-risk borrowers while rewarding a small group of low-risk borrowers with fee credits.

In the updated model, even 720 credit scores with a 20 percent downpayment won't protect mortgage applicants from the risk-based fees and they can range as high as 2.750 percent, depending on credit scores and loan-to-value.

Fannie Mae will continue the practice of rewarding low-risk borrowers with fee credits.

Fannie Mae's second pricing change involves the Adverse Market Delivery Charge and it is not risk-based -- it applies to all applicants equally.

First introduced in December 2007, Adverse Market Delivery Charges are mandatory surcharges on all conforming mortgages. The fee was initially a quarter-percent. It's now doubled to 0.500 percent.

Combining risk-based pricing and delivery fees, mortgage applicants have two choices to pay them:

1. As a one-time fee, paid at closing, payable to the lender
2. As an interest rate increase, payable month-after-month to the lender

The one-time fee is calculated by multiplying to fee amount by the applicant's loan size and dividing by 100. The interest rate increase is calculated as a general rule, where each 0.500 percent in fees can be substituted for a 0.125 percent increase to a mortgage rate.

The fees become "official" October 1, 2008, but lenders are expected to deploy them much sooner.

Looking Back And Looking Ahead: July 14, 2008

Mortgage rates fell slightly in a week that included a bank failure, more oil price spikes, and questions about the health of the nations' mortgage market.

Rates would have fallen more if not for a late-Friday sell-off that added 0.125 percent to most products.

As financial markets fell under stress, most people missed the strong points that emerged about the U.S. economy last week:

1. Fewer Americans filed for unemployment benefits
2. Wal-Mart reported stronger-than-expected sales
3. Consumer confidence rose for the first time in 7 months

And, also worth noting: homes under contract slipped but remained above the lowest levels of the year, suggesting a potential housing floor.

But, the biggest story of last week was the stock-price collapse and subsequent pressure on Fannie Mae and Freddie Mac. It should be the biggest story of this week, too.

So far, Fannie and Freddie's issues appear to be more psychological in nature than fundamental, but to an already roiled market, negative perception can quickly become reality. This is one of the biggest reasons why both the Federal Reserve and the U.S. Treasury made public statements Sunday in support of Fannie and Freddie, and in advance of the Asian markets' opening.

Other events that may move markets this week include Retail Sales data on Tuesday, consumer inflation data on Wednesday and Ben Bernanke's two-day testimony to Congress which takes place over both Tuesday and Wednesday.

It's unclear in which direction mortgage rates will go, but because the markets are on-edge, expect rate movements to be sharp and quick. In other words, if you're in the market for a mortgage this week and you see a rate and payment you like, don't mess around with it -- just get it locked.

(Image courtesy: Wall Street Journal Online)