Fannie And Freddie Set To Make Mortgaging Easier

Correction: An earlier version of this post incorrectly stated that the minimum credit score floor was lowered to 620 on December 1. In fact, the 620 guideline was already in place although not widely used by lenders, FannieMae rep and warranty changes went into effect on December 1 in the hopes that lenders would begin to use this standard.  The 3% down payment has not been finalized and has not yet been announced. I apologize for these errors. Mark

Representations and warranties for existing but underutilized  Fannie Mae and Freddie Mac guidelines came online Monday that will make it easier to get a mortgage to buy a home. The mortgage giants have a minimum credit score floor of 620 but most lenders have been reluctant to incorporate that standard in underwriting guidelines.  As well, consideration is being given to lowering the minimum down payment from 5% to 3%, but no decision or announcement has been made.  Obviously this would be great news for prospective homebuyers that do not have a lot of money to put down or may have some challenging credit history. This will of course add homebuyer candidates to the buyer pool and should create increased demand in the housing markets.

These expanded guidelines, if prudently applied, could add a layer to the mortgage and home buyer consumer market that is presently underserved.

That being said, if these new guidelines speak to your borrower profile, do not expect to just head over to your local mortgage lender and pick up a briefcase full of house buying cash.

How easy it will be to get conventional loans with 3% down payments and 620 credit scores is another issue. Mortgage lenders live in the cocoon of Qualified Mortgage protection and while this easing may in fact expand Ability-To-Repay parameters, a price will be paid to fortify these riskier loans. That price will take the form of higher risk based interest rates, more expensive PMI (mortgage insurance), increased reserve asset requirements, even tougher debt ratio standards. Easier is not a synonym for expanded and expanded is what is really happening to Fannie and Freddie guidelines.

The real bonus with these expanded guidelines is how conventional financing will be positioned for direct competition with FHA loans. FHA, HUD and the deficit black hole that is the Mutual Mortgage Insurance Fund are about to see demand for overpriced Mortgage Insurance Premiums plummet. FHA MIP has increased five times over the last three years and is now priced beyond the point where anybody at HUD can reasonably explain why. Add to this Cadillac mortgage insurance pricing the fact that there is no way to get rid of FHA MIP regardless of equity, and conventional financing becomes the ipso facto clearly more attractive alternative.

The math is pretty simple: FHA requires upfront MIP and conventional PMI does not. FHA MIP is more expensive than conventional PMI, and oh yeah, FHA MIP stays with the loan for the life of the loan regardless of equity, while conventional PMI allows for current appraisal supported equity of 22% to eliminate PMI. The choice is simple; no possibility of parole or parole.

Conventional loans are tougher on things like debt ratios (comparing monthly income to mortgage payments and recurring debts), but every FHA mortgage consumer should have their mortgage rep take a long and hard look at whether a conventional loan with a 3% down payment or a 620 credit score is a viable option.

I have been notoriously hard on HUD, the FHA, even Commissioner Galante about the consumer gouging nature of ever increasing FHA mortgage insurance premiums and the interestingly managed runaway deficit MMI Fund. Free market economics have a way of correcting and creating balance even in engineered market sectors. With expanded conventional mortgage financing in one corner and positioned directly against FHA mortgage financing, the current and only game in town in the opposing corner, FHA MIP may be market forced to competitive pricing. Otherwise, FHA mortgage business will fall victim to accelerating conventional originations and that MMI Fund deficit will collapse on itself. Watch.