Fannie Mae is scrapping a "declining markets" policy that required loan underwriters to boost minimum down-payment requirements by 5 percent in areas where home prices are falling or difficult to determine.
Beginning in June, Fannie Mae will instead require 3 percent down payments for conventional, conforming mortgages processed through its Desktop Underwriter automated underwriting system, and 5 percent minimum down payments for loans processed manually. Larger down payments may be required depending on occupancy, property and transaction types.
The new single national down-payment policy will retire a controversial declining-market policy announced in December. The policy, implemented Jan. 15, boosted the minimum down payment required by 5 percent when Desktop Underwriter flagged a property as being located in an area of declining home prices or where it was difficult to assess home values. The policy also applied if an appraiser determined a property was in a declining market.
In an April 11 letter, the National Association of Realtors complained to Fannie Mae that "entire metropolitan statistical areas (MSAs) have been tagged as declining markets regardless of the actual values in the local neighborhoods, which further discourages potential buyers from entering the market."
The policy kept some would-be home buyers from taking action because they could not come up with the funds to make the increased down payment. Others avoided buying because they were afraid to do so if prices were still declining.
"In either case, the impact of the policy becomes a self-fulfilling prophecy that creates declining markets that did not exist before and intensifies the decline for markets that are declining and delays their recovery," NAR President Richard Gaylord said in a letter to Fannie Mae Chief Executive Officer Daniel Mudd.
Fannie Mae says it's able to move away from the declining markets policy because the latest version of Desktop Underwriter -- Version 7.0 -- will limit risk layering and assess each loan more precisely.
"At the same time, we believe that equity matters, especially in this market," Marianne Sullivan, Fannie Mae's senior vice president of single-family credit policy and risk management, said in a statement. "Down payments are a critical success factor in home ownership -- and responsible lending is good business."
Private mortgage insurers who insure most loans purchased by Fannie Mae and Freddie Mac in cases where borrowers put down less than 20 percent have their own requirements, including 3 percent minimums and stricter standards in declining markets (see story).
Fannie Mae's new national down-payment policy is part of the company's "Keys to Recovery" initiative announced May 6, which also includes improved pricing for jumbo-conforming mortgages to help borrowers in high-cost areas.
Through the end of the year, Fannie Mae announced this month that it will buy the new jumbo-conforming loans -- up to $729,750 in high-cost areas -- at the same price as loans that meet the conventional conforming loan limit of $417,000.
Congress gave the government-sponsored enterprises the ability to purchase mortgages larger than the conventional conforming loan limit of $417,000 in the hopes of bringing down interest rates on jumbo loans.
But until recently, the "spread" between conventional conforming loans and jumbo loans had remained pronounced -- about 1 percent -- and lawmakers have expressed disappointment about the pricing of jumbo conforming loans.
Although rates on jumbo conforming loans have come down, the House Financial Services Committee will hold a hearing on May 22 to examine the steps taken to implement the new loans and the impact on home buyers and the housing market.
Update on Elimination of Declining Markets Policy
May 29, 2008 Advisory E-mail Message to Seller/Servicers
On May 16, we announced the elimination of our declining markets policy to provide a simplified way for lenders to determine the maximum allowable financing for loans that we will purchase. In today's special Single-Family Seller/Servicer Guide (Guide) Bulletin [PDF 210K], we are following up on this announcement by providing the detailed requirements for this change.
For mortgages with application dates on or after June 1, 2008, we are eliminating the requirement to reduce the maximum LTV/TLTV/HTLTV ratios when a property is located in a market with declining home values.
For mortgages with application dates on or after June 1, whether manually underwritten or assessed through Loan Prospector®, we will continue to allow maximum financing up to 95 percent LTV for most purchase and no cash-out refinance mortgages secured by 1- to 2-unit primary residences or second homes–in all markets. For low- and moderate-income borrowers and borrowers in underserved areas, we will continue to provide up to 100 percent LTV and 105 percent TLTV financing for 1-unit primary residences through our Home Possible® Mortgages.
To help ensure that borrowers are using purchase transaction Home Possible Mortgages with higher LTV/TLTV ratios to purchase homes they can afford and keep, effective June 1 and as previously announced, we will require homeownership education before the note date when all borrowers are first-time homebuyers. At the same time, we are also ensuring borrowers have an appropriate credit history.
In addition, as a result of our review of our maximum financing requirements, we are making adjustments to maximum financing requirements for certain mortgage products and transaction types to ensure they more appropriately reflect sound lending practices in the current market environment. With today's Bulletin, effective for mortgages with application dates on or after June 1, 2008 we are also:
Announcing that we will no longer purchase mortgages with LTV/TLTV/HTLTV ratios greater than 95 percent, with the exception of: FHA/VA Mortgages, Section 502 GRH Mortgages, Section 184 Native American Mortgages and Home Possible Mortgages with LTV and TLTV ratios greater than 95 percent, subject to all existing requirements for these mortgages. Note that as previously announced, Home Possible Mortgages with an LTV/TLTV ratio greater than 97 percent must have an Indicator Score greater than or equal to 700.
Eliminating the requirement announced in our May 2 Guide Bulletin of a Loan Prospector® Accept Risk Class for purchase and no cash-out refinance mortgages with LTV/TLTV/HTLTV ratios equal to or greater than 95 percent. We established this requirement as a condition for reducing maximum financing to 95 percent for mortgages in declining markets where maximum financing was equal to or greater than 95 percent. This requirement, along with other requirements in our May 2 Bulletin, no longer applies as a result of the elimination of our declining markets policy.
Reducing the maximum LTV/TLTV/HTLTV ratios for:
Cash-out refinance mortgages secured by 1- to 2-unit primary residences or second homes to 85%/80%/85%/90% LTV without and with secondary financing/TLTV/HTLTV (this includes cash-out refinance Initial InterestSM Mortgages).
Purchase and no cash-out refinance mortgages secured by 1- to 2-unit investment properties to 85%/80%/85%/90% LTV without and with secondary financing/TLTV/HTLTV.
Modifying our current Alt 97® Mortgage requirements to reduce the maximum financing to 95 percent LTV/TLTV (for Alt 97 Mortgages with secondary financing, the maximum LTV ratio is reduced to 90 percent).
Adjusting our maximum financing requirements for Home Possible Mortgages and lender-branded affordable mortgages secured by:
2-unit properties, by reducing the maximum LTV ratio to 95 percent, and reducing the maximum TLTV ratio to 100 percent.
3- and 4-unit properties, by maintaining the maximum LTV ratio at 95 percent, and reducing the maximum TLTV ratio to 100 percent.
Revising Guide Exhibit 19, Postsettlement Delivery Fees, to reflect the reduced LTV/TLTV/HTLTV ratios. There are no changes to our delivery fees or fee rates as a result of these changes. However, all applicable current postsettlement delivery fees continue to apply, including the Market Condition delivery fee.
Implementing These Changes
All changes in this Bulletin supersede the maximum financing requirements that previously applied to mortgages secured by properties located in declining markets. This includes the changes we made to LTV/TLTV/HTLTV ratio reduction requirements in our May 2 Bulletin.
There are no changes to our delivery requirements as a result of today's Bulletin.
In addition, please see the Bulletin for more information on:
To cover pipelines for mortgages originated under our declining markets policies in effect before June 1, 2008, these mortgages are still eligible for sale to us provided they met all of our previous requirements and have Freddie Mac Settlement Dates on or before August 31, 2008.
Specific information on how the changes we announced today may impact your Master Agreement.
Information for Loan Prospector Assessments
At this time, we will not update Loan Prospector to reflect our new requirements. For mortgages assessed in Loan Prospector with application dates on and after June 1, 2008, you will need to perform a manual review of the mortgage file to ensure the mortgage meets the requirements announced in today's Bulletin and is eligible for sale to us.
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