Mortgage News

Four times annually, the Federal Reserve surveys 84 banks around the country about general lending standards and banking conditions.

One of the survey questions asks about current mortgage lending standards and whether it’s getting harder, or easier, to get approved for a home loan.

Modified from the report, we see that nearly 80 percent of banks are making it harder for "prime" borrowers to get a mortgage.

This is up from 18 percent a year ago and underscores mortgage lender risk aversion among even the "most qualified" among us.

A six-figure income or impeccable credit is no longer good enough to get you carte blanche with the bank — you’ve got to have the complete package and this chart is your proof of that.

Now, some of the areas in which mortgage guidelines are tightening are well-known:

• More thorough income documentation
• Higher credit score requirements
• Larger downpayment requirements

But most of the areas are less well-known and constantly changing.  They includes the dark corners of mortgage approvals, addressing esoteric items such as:

• Investment property cash flow
• Appraised values and comparable sales
• 30-day delinquencies and credit character

And it’s only expected to get harder. 

So, if you already know you’re buying a home next Spring, talk to a loan officer now and put a purchasing plan in place.  This is especially true if you’re converting your primary residence into an investment unit — more than a few would-be buyers have been burned already by new rules that specifically exclude some types of rental income.

Where 80 percent of banks go, the other 20 percent is likely to follow.  The best way to prepare for these changes is to ask good questions in advance of your actual needs.  That way, you’re planning proactively instead of scrambling reactively for additional downpayment at the 11th hour of your purchase.

Effective October 1, 2008, Fannie Mae is making home loans more expensive for Americans.  You may want to bookmark this page because where Fannie goes, Freddie often follows.

The first part of Fannie’s two-part change is a remodel on its risk-based fee structure, also known as loan-level pricing adjustments.  The original model was eighty-sixed after just 12 weeks.

To read the fee chart, locate the intersection of your credit score and mortgage loan-to-value.  The cross-section is your risk-based mortgage fee, as mandated by Fannie Mae, and represented by this formula:

Risk-based fees are relatively new to conforming borrowers; mortgage pricing was previously one-size-fits-all.  Today, however, not so much. 

20 different conforming borrowers might be offered 20 distinct mortgage rates and none of the them would be considered out-of-market.  It’s one reason why "ballparking" a mortgage rate is so darn tough these days.

But don’t be discouraged if the risk-based pricing model confuses you — it’s actually one with which we’re all pretty familiar.  Think auto insurance. 

With auto insurance, the cost of a policy increases as a driver’s perceived risk to the insurance company increases.  A "safe" profile, in other words, is rewarded with lower premium.

The same methodology applies to loan-level pricing adjustments and, in this sense, LLPAs are strangely fair — the highest risk borrowers are paying the highest costs.

Fannie Mae’s second pricing change, however, is not as democratic.

Across the board, Fannie Mae is doubling its Adverse Market Delivery Charge to 0.500 percent. 

This is a blanket fee that applies to all mortgages that Fannie Mae securitizes, regardless of credit score or loan-to-value.

Everyone pays.

Now, consider: This is the 3rd and 4th time since December 2007 that Fannie Mae stepped between Wall Street and Main Street to alter mortgage pricing. 

This is bad news because rates are supposed to be determined by the price of mortgage bonds alone.

Instead, rates are being set by the price of mortgage bonds plus whatever fees Fannie (or Freddie) tack on top.

And, so long as Fannie and Freddie project a growing number of mortgage defaults in their respective portfolios, we can expect that loan-level pricing adjustments will increase for a 5th and 6th time sometime before the New Year.

Watch this 5-minute video on the mortgage market and you’ll understand what I mean.  Guidelines are shrinking, costs are rising, and underwriting is a giant kludge.

So, why is now a good time to buy a home?  Because, all things equal, it’s going to be a heckuva lot more expensive and a lot more difficult to get it financed in the future.  Markets are still contracting, folks.  Fannie’s new fees are proof.