Fannie Mae will tighten lending standards for most Adjustable Rate Mortgages (ARMs) and interest-only mortgages.
For ARMs with initial periods of 5 years or less, Fannie Mae will require that borrowers be qualified at the greater of the note rate plus 2 percent or the fully indexed rate (index plus margin).
All loans not meeting the new guidelines must be purchased as whole loans on or before August 31, 2010, or delivered into MBS pools with issue dates on or before August 1, 2010.
Fannie is also going to change criteria on interest-only loan products, capped at 70% loan-to-value ratio with the borrower FICO at 720 or higher. Balloon mortgages will no longer be eligible under the new guidelines.
I’m not a mortgage expert but I think Fannie Mae is going overboard here.
In much of metro Phoenix, prices have likely bottomed out so I don’t think Fannie Mae needs to be so tight. These would have been great standards in 2005 but not in 2010, at least not for metro Phoenix.
In addition, by basing their mortgage standards on what’s going on in the U.S. national housing market, Fannie Mae probably accentuates the swings in Arizona home prices. That is, when Arizona home prices were going crazy, Fannie made the Arizona bubble worse with its loose mortgage standards. Now Fannie Mae is making the bust worse by continuing to tighten mortgage standards even in Arizona where prices have already bottomed out in many areas.
That’s one of the problems when government programs like Fannie Mae and Freddie Mac dominate the mortgage market (see “96.5% of Mortgages Backed by Government“.) We tend to get national one-size-fits-all mortgage policies even if they don’t fit Arizona at all.
Bottom Line – We’ll have less money chasing housing after August 1, 2010.