SO YOU THOUGHT YOUR HOME BUYER WAS A GOOD RISK? THINK AGAIN.
* * * * WARNING, HARD CORE REAL ESTATE TALK * * * *
If your home buyer has a FICO Score of less than 680 and a down payment of less than 30%, the cost of mortgage money has increased significantly.
Unlike the "subprime" loans of the past several years that have been processed by "subprime departments" of mortgage institutions or brokered to subprime specialists, these loans will be handled routinely. While borrowers with FICO scores of 620 to 680 may not be considered subprime, their scores are "rated" for additional pre-set premiume of from 2% to 3/4%. Further, this "rating" of loans by credit score will encourage many lenders to "push" marginal borrowers into subprime loan instruments as they have often done in the past.
Fannie Mae's most recent report states that the average FICO score for the bundled loans that they buy is 721. That alone indicates a system of "creaming" of loan packages. The new rating of loans based on credit scores alone, is likely to make mortgage financing much more difficult for borrowers with scores of less than 680.
If you think a home buyer with 20% down is a good risk, think again.
The changes in the fees Fannie and Freddie will be requiring of borrowers will, as of March 1, 2008, apply to home buyers with FICO scores of below 680 rather than the former score of 620 or below. Further, and very important, these new fees will apply to home buyers who are putting down less than 30%. That's right, not the traditional 20% required for Private Mortgage Insurance, but 30%.
FOR A $300,000 PURCHASE WITH 10% DOWN:
FICO 620 or below, the premium will be 2% of the amount borrowed and the home buyer will have an additional fee of $5,400.
FICO 620 to 639, the premium will be 1.75% of the amount borrowed. The home buyer will have an additional fee of $4,725.
FICO 640 to 659, the premium will be 1.25% of the amount borrowed. The home buyer will have an additional fee of $3,375.
FICO 660 to 679, the premium will be 0.75% of the amount borrowed. The home buyer will have an additional fee of $2,025.
Of course, borrowers can elect to roll these fees into the mortgage interest rate, thereby raising the interest rate by up to 1/2% or more. Add the higher cost o
f PMI and it's likely that rates will increase by 1% or more.
HIGHER MORTGAGE INSURANCE PREMIUMS
Sure to follow will be an increase in Private Mortgage Insurance premiums. Some in the industry predict an effective doubling of the PMI costs for conventional conforming loans, those purchased by Fannie and Freddie. On a $300,000 home purchase with a 10% down payment, the Private Mortgage Insurance cost will be about $4,590. Further, many private insurance providers will no longer insure loans with less than 5% down. If your home buyer has a FICO score of 659, their increased cash needs for settlement will increase by about $7,700 or an increase in interest rate to finance the increase cost.
THE AMERICAN DREAM JUST BECAME MORE COSTLY.
RATE SHOPPING AS WE KNOW IT IS OVER.
One thing is for sure. Buyers will find it more and more difficult to shop for lenders with the lowest rate because 
rates will become much more FICO Score sensitive than before. It will be difficult for any lender to quote a rate without looking at the prospective borrower's credit score. How will this affect the mortgage companies that advertise rates on the Internet??
BUYERS AGENTS: It will also make it much more difficult for real estate agents who are writing a contract to prepare a Buyer's Estimated Closing Cost document. How much additional closing costs for lender fees can an agent estimate without knowing the credit score? When determining a prospective buyer's price range for search, the answer will have to be "depending on your credit score", based on your income and cash available, you area in an approximate price range for initial search of $XXX." Price ranges will be much more credit score sensitive now than in the past when income was the factor used.
Since these additional fees apply to buyers with less than 30%, more buyers will have larger 2nd trust financing or HELOC lines which also carry a higher interest rate than the underlying mortgage loan. Buyers with limited cash are going to be faced with significantly higher monthly payments or will be limiting their searches to lower price ranges. If buyers can't find homes that suit their needs and wishes in the lower price ranges, they are not likely to buy.
DO THE "RISK BASED" CREDIT SCORE PREMIUMS VIOLATE THE FANNIE MAE MISSION??
Fannie Mae and Freddie Mac are Government Sponsored Enterprises and as such, enjoy a $2,250,000,000 line of credit from the U.S. Treasury Department. Fannie and Freddie are also exempt from state and local taxes (except property taxes). Although Fannie and Freddie are government sponsored, they are shareholder owned corporations and are regulated by HUD. To enjoy the special previleges of a GSE, Fannie and Freddie are required to operate in a financially sound manner in the performance of their MANDATED mission.
THE PUBLIC PURPOSE OF FANNIE AND FREDDIE MISSION
Under the Government Sponsored Enterprise Act, Fannie and Freddie have a mission, under the law, to devote a
percentage of their business to three specific affordable housing segments:
Low and Moderate Income Housing
Special Affordable Housing
Underserved Areas
The most recent goal levels were implemented in 2004 and are effective through 2008.
Low and Moderate Income Housing 56%
Special Affordable Housing 27%
Underserved Areas 39%
HUD has no requirement for the total number of home purchase mortgages that Fannie and Freddie must buy. However, they are required to buy a percentage in each category. If Fannie buys a million mortgages, 470,000 of them must be for low and moderate income families. Perhaps Fannie and Freddie do not know that low to moderate income home buyers are not the group with the highest FICO scores.
NO HELP FROM FANNIE AND FREDDIE FOR HOME BUYERS. "Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Our job is to help those who house America." Fannie Mae Mission Statement.
Fannie Mae's stated mission is NOT to help the home buyers who finance the purchase of the homes in America.
UPDATE: Since publishing this article early this afternoon, Washington Mututual, the country's largest Savings and Loan, slashed it's dividend from $0.56 to $015, plans to reduce it's home loan positions by 2,600 employees, plans to set aside $1.5 billion and $1.6 billion for loan losses in it's 4th quarter. Finally, WaMu plans to discontinue it's subprime division. They don't need to discontinue the subprime division, any borrower with a FICO score of below 680 will be subprime.
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