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):

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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)