Fannie Mae Lending Guidelines Change; More Strict On Borrowers

In conjuction with the temporary raise in loan limits, Fanne Mae has announced new lending guidelines for these new "jumbo-conforming" loans, which are more strict on borrwers than before. The possibility of this happening is why we wrote a post questioning whether the economic stimulus bill and higher loan limits would have a positive or negative effect on the housing and lending market.

In a nutshell, the new guidelines state that you:

• must have more money for a down payment
• need higher credit scores than before (in some cases)
• must have more money in reserves
• need to have less debt
• have to use at least 5% of your own money for a down payment rather than using all of the gift money from family towards the down payment
• are not allowed to receive more than 3% seller concessions

Here’s the above "in a nutshell" summary in more detail (directly from Fannie Mae):

Read more

Why Are Interest Rates Going Up?

Many consumers are wondering why interest rates are going up (click on image to enlarge) despite the approval of the economic stimulus bill and higher loan limits on Feb 13. To help answer this question, here is an article from Cathy Jones, Senior Mortgage Lender with OlympiaWest Mortgage Group:

"The short week turned out to be one of the most volatile in recent years. Early in the week, mortgage rates surged to the highest levels of the year, before they turned around and recovered nearly to their starting level, leaving only a small rise for the week. With the Fed cutting rates and pumping liquidity into the economy, and the government implementing fiscal stimulus programs, mortgage investors became increasingly worried that the stimulus would lead to higher inflation, which is negative for mortgage markets. The major inflation data released during the week amplified those concerns, as the January Core Consumer Price Index rose at a 2.5% annual rate, which was higher than the consensus estimate.

Perhaps contrary to what one would expect, the recent Fed rate cuts have led to higher mortgage rates as opposed to lower mortgage rates. To understand why, it’s important to understand that the Fed only controls short term interest rates. When they cut rates, it generally has the effect of increasing bank lending and consumer spending, which leads to more economic activity. Long term rates, such as 30-year mortgage rates, are determined by trading in financial markets and are highly impacted by expectations for future inflation. To a mortgage investor, a Fed rate cut increases the risk of higher future inflation, and that has been the dominant sentiment in recent weeks. This explains why 30-year mortgage rates have jumped 0.75% since the Fed’s aggressive January 22 rate cut.

In the housing sector, the news was mixed. January Housing Starts rose slightly from December, while Building Permits, a leading indicator of future activity, fell to the lowest level since November 1991. The National Association of Home Builders (NAHB) Housing Market Index showed a small increase. According to the NAHB, builders have been attempting to reduce the inventory of homes on the market, and there has been an increase in the flow of prospective buyers."

As we mentioned last week, you shouldn’t base your decision on whether you buy or sell primarily on the economic stimulus bill and higher loan limits. And as you can see, rates went up in the last two weeks despite the bill being approved so the bill and the higher loan limits are not the "cure" that many thought it would be.

Further Reading:

"Interest Rate Roundup" – BankRate.com

Fed Chair Ben Bernanke’s response to the question (video)

New Loan Limit Announced For Washington, DC Metro Area Including Loudoun County

New loan limits in the Washington, DC metro area including Loudoun County will be $562, 200, according to this podcast by Dick Gaylord, President of the National Association of REALTORS® (the second half of the podcast does not necessarily apply directly to this issue).

For more information on how the bill and new loan limits may affect buyers and the overall housing market in Loudoun County, check out this post.

Are You Waiting For The Higher Conforming Loan Limits To Hit Loudoun County?

Are you waiting for the higher conforming loan limits to hit Loudoun County before deciding to sell and/or buy?

Are you betting that the new limits in Loudoun County will be increased to $729,750?

Are you you hoping that the new limits will bring down the rates on "jumbo" loans?

Many buyers are waiting, betting and hoping while sitting on the sidelines. But are they waiting in vain and do they have a false sense of hope?

1. According to preliminary reports, the new "jumbo conforming" loan limits would be somewhere around $547,500 in the Washington, DC metro area (including Loudoun County). Some executives and lawmakers say that it will be closer to $600K, if not a bit higher. But the majority believe the new limit in this area will not be the maximum amount of $729,750. (Click here for more on this)
2. The way that these new "jumbo conforming" loans are structured may actually increase the rates on those loans and/or current conforming loans under $417K. It could also potentially freeze up loan markets due to illiquidity. (Click here for more on this)
3. By the time Fannie, Freddie, Ginnie, SIFMA and everyone else involved work all this out, it could months, if not a year before we see this come to fruition. And who knows what the effects will be once we do.

So before you base your decision to buy and/or sell on the economic stimulus bill or the new loan limits, know that it’s far from being realized in the manner it was intended by anyone in Loudoun County. Remember…there is no magic pill, I mean bill that will "instantly save us all".