Fannie Mae & Freddie Mac Told to Immediately Adhere to New Mortgage Underwriting Guidelines
In October 2006, new mortgage underwriting guidance was proposed to help mitigate risky alternative mortgages, such as interest-only and pay option arms.
There appears to have been a lack of action taken by the mortgage companies and the OFHEO is not happy about it.
They have issued a demand directly to Fannie Mae and Freddie Mac now to also follow the suggested Interagency Guidance on Nontraditional Mortgage Product immediately with a final compliance deadline of Feb. 28, 2007.
The impact of this will be far reaching since Fannie Mae and Freddie Mac are GSE's and every mortgage lender will be required to follow these guidelines in order to be able to sell to Fannie Mae and Freddie Mac or they will no longer purchase these types of mortgages.
I commented on what the potential impact would be on home prices with these new mortgage guidelines and it was not pretty.
As an example of what (or should I say WILL now?) can happen based on just one of the mortgage guidelines found at the bottom of page 8 and top of page 9, which states...
... the proposed general guideline of qualifying borrower at the fully indexed rate, assuming a fully amortizing payment including potential negative amortization amounts, remains in the final guidance.
... final guidance does not exclude interest-only loans with extended interest-only periods.
So what does that mean?
Borrowers will now qualify for significantly smaller mortgage loan amounts... and smaller mortgage loan amounts equal lower home selling prices.
This is no different than if household incomes dropped and borrowers could only afford smaller mortgage payments.
Use this mortgage qualifying calculator to see just how big the impact is to you, people you know or it's impacts to averages in your area.
Here is a small calculation performed to determine maximum mortgage amounts:
- Assuming mortgage rate of 6.00%,
- a gross monthly income of $6,000 a month or $72,000 a year
- total monthly revolving bills of $500
Maximum Mortgage Amounts excluding down payments:
Interest Only Mortgage: $296,000 - current guidelines
- vs. -
Fully Amortized: $246,852 - as required by new interagency mortgage guidance.
As you can see from this example there is a $49,148 difference in loan amount.
Put another way... the borrower qualifies for a loan amount that is almost 17% less using the new guidance.
This would lead me to assume he / she will buy a home that costs 17% less.
If use supply and demand... supply is up, demand is still o.k. but if the demand is stifled by the maximum amount one can afford due to mortgage guidelines , prices must come down.
Again, keep in mind if national household incomes dropped then home prices would also drop... same thing with stricter guidelines.
Can this be the final nail in the coffin to cause national real estate prices to drop 17% or more in 2007?
What do you think the impact of these mortgage guidelines will be on real estate prices?