Fannie Mae Increases Down Payments on MyCommunity® and Standard Loans

In another backward-thinking move, Fannie Mae has very subtly announced that they will be increasing their down payment requirements by decreasing their maximum Loan to Value Ratios for MyCommunity® mortgages and for standard mortgages on 1-unit primary residences effective on or after the weekend of November 16, 2013. The previous allowed down payments were at 3% based on a Loan to Value Ratio (LTV) of 97%.

The difference between 95% LTV and 97% LTV financing may sound slight but on a macroeconomic level, it’s huge. It will postpone purchases for multitudes of buyers; particularly first time homebuyers who might find themselves in situations where they have to save longer before they get into the game of homeownership.

Perhaps more profound will be the unforeseen effect of limiting choices on mortgage insurance. For many if not most buyers, borrower paid monthly mortgage insurance on a conventional loan is the worst choice. Often the best choice is Single Premium Financed PMI but even Split Premium or Lender Paid PMI are usually better choices than standard monthly PMI. If these choices seem eye crossing, click here for a PMI comparison and click here for a method of calculating and comparing PMI and you’ll see what I mean. This change by Fannie Mae will effectively make it more difficult for the consumer to take advantage of what has likely come to be the most advantageous form of PMI. This is a serious unintended consequence and could have been avoided by limiting the LTV to 95 and the HCLTV to 97%. A little forethought could have avoided this travesty.

To me, this is as backward looking as Fannie Mae’s recent guideline change regarding condos. Yes the default rates were high in 2012 on condos but those defaults were on legacy loans not the new ones. The time to tighten condo guidelines was in 2008 and not 2012. This is no different. The time to require higher down payments was 4 years ago. This last thing we need right now.

Sorry for the bad news. Don’t shoot the messenger.

Here’s an expert from the Fannie Mae Release Notes:

LTV/CLTV/HCLTV Ratio Cap Lowered to 95%

DU Version 9.1 will reflect lower maximum LTV/CLTV/HCLTV ratios for standard and MyCommunityMortgage® (MCM®) fixed-rate transactions secured by a 1-unit primary residence. Those transactions will be subject to a maximum LTV/CLTV/HCLTV ratio of 95% (instead of 97%). DU will continue to allow CLTV ratios of 105% when the subordinate financing is a Community Seconds® mortgage.

Note: HFA loans submitted to DU are subject to separate LTV/CLTV ratios. For specific HFA guidelines, lenders should contact their state Housing Finance Agency (HFA), and mortgage brokers should contact their DO sponsoring wholesale lender. As a reminder, lenders must have approval to deliver HFA loans to Fannie Mae.