Fannie and Freddie Tighten Up and Increase Their Fees

In an effort to curb the tide of mortgage defaults, Fannie Mae and Freddie Mac have toughened their standards and increased the fees lenders pay to sell mortgages to the secondary market by these industry giants.

Last year, the U.S. Government took guardianship of Fannie and Freddie to ensure continued liquidity in the secondary mortgage market, an important part of doing business in the housing industry.   Since that time, certain risks have been factored into the final rate a borrower received based on loan characteristics. These are known to the industry as pricing adjustments, and have effectively negated the downward trend of mortgage rates for some borrowers.   Although these adjustments were to take effect on loans purchased by these government sponsored enterprises on April 1, 2009, the major banks made a sweeping decision to implement them almost immediately.

Loans prone to default have certain risk characteristics. The default rates are highest for borrowers with lower credit scores, lower equity into a property, 30 to 40 year amortizations and/or interest-only, cash-out refinances (pulling equity), the existence of subordinate financing, multi-unit properties, and condominiums.

Some of the hikes in rate pricing are: 75 basis points for condo units with less than 25% equity stake; 25 basis points for interest-only payments; 25 to 300 basis points for credit scores coupled to loan-to-values; 25 to 300 basis points for cash-out refinancing; and 100 basis points for 2-unit properties.   For example, a condo with 25% down payment might enjoy a 5.25% rate, but the same borrower putting down 24% would get 6.00%.   And that™s not figuring in other adjustments, such as to the credit score which requires the use of a tiered matrix to determine if an additional hike is warranted.

All the stimuli the legislators can muster cannot control the markets, as the markets always find balance and account for the real risks encountered by investors of mortgages.   Hindsight now tells us we should have been rewarding the prime customers all along instead of providing easy money to so many that did little to deserve the best rates.   Today™s market makers would not need to employ such draconian methods into a free market system reeling from misguidance.

Risk based adjustments are nothing new and have been used to determine the final interest rate for mortgages, credit cards, and auto loans.   Many auto insurers use them to determine premiums.   Keep in mind that rates are still historically low, even with these pricing adjustments.   Thinking about getting a home loan soon?   This is no reason to put off a refinance if the rate available to you now is much lower that the one you already have.   Interest paid on a primary residence is an income tax write-off, whereas on a business property it is an expense deducted against rental income.   Regardless of the interest rate, real estate purchased to fulfill the need for shelter or some other worthwhile use always makes sense.  Leverage a property sensibly and enjoy the rewards for years to come.

© 2009 Michael S. Amers

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