Investment Properties Affecting New Mortgages

Some homeowners who are looking to refinance their primary residences may find they have some difficulty qualifying for a new loan, even though little has changed in their situation of income and credit over the last year.

They may be hindered by investment property they hold.

Specifically, revised Fannie Mae guidelines apply to borrowers who instead of selling a former home to buy a new primary residence turned it into a rental property.

Fannie Mae now requires that you have at least 30% equity in that former primary residence before you can count the rental income.   This can be a hefty hurdle in today’s soft real estate market.

An investment property could’ve easily declined in value over the last three years. 

Furthermore, to show that the 30% equity value exists, borrowers will need to get an appraisal of that former property, as well as a rental analysis performed by a licensed appraiser.

As it is and was, underwriting guidelines only allow borrowers to count 75% of their rental income on investment properties.  The other 25% is ignored, chalked up to property maintenance costs and possible tenant lapses. 

But that 75% is golden when it comes to getting a new loan, even on the primary residence.  Many borrowers need to count those rent checks in their overall income.  Otherwise, their debt to income ratio (DTI) is too high to qualify for a new loan.

In this situation, the borrower may not be in any financial trouble.  They may be bringing in enough money from their salary and rental income to handle all their obligations.  But the underwriter can’t see it this way. 

She looks at the two mortgages and other debt.  And she can’t balance this with any of the borrower’s rental income.    She can’t approve the loan because the borrower, on paper, doesn’t make enough money.

Thus some borrowers trying to refinance their present home can’t qualify.

Again, this specific requirement only occurs on rental properties the borrower once resided in.  It does not apply to houses that were bought and never lived in by the owner.

Do You Have A Fannie Mae Loan?

One of the first requirements in qualifying for a refinance or modification through Fannie Mae's Making Home Affordable program is actually having a Fannie Mae Loan.

Now you can find out with Fannie Mae's recently release online tool:

Fannie Mae Loan Lookup


And if you're loan isn't with Fannie Mae, it could be with Freddie Mac (who also has Making Home Affordable programs):

Freddie Mac Loan Lookup

HASP Refinances Clarified - GSE's Home Affordable Refinance Program

Along with the Obama Adminstration's announcement of the Homeowner Affordability and Stability Plan on Wednesday, Fannie Mae & Freddie Mac has also released information about their role in the plan.

Termed the "Home Affordable Refinance", the two GSEs will be relaxing certain guidelines and price adjustments on refinances to help homeowners reduce their housing costs. Here are the significant features of the new refinance program:

1.) Allows up to 105% Loan to Value (LTV) and no maximum Combined LTV (1st and subordinate loan combined).
2.) No minimum credit score.
3.) May not require an appraisal (appraisal waiver) or exterior-only appraisal.
4.) Eligible property types - primary residence, 2nd/vacation home & investment properties
5.) Limited cash out only - no additional equity allowed to be taken out, but closing costs and up to $2,000 may be included. Existing subordinate loan(s) must be re-subordinated.

The BIG Caveat: The Home Affordable Refinance is for existing Fannie Mae or Freddie Mac mortgages only. No subprime, Alt-A, Jumbo, Reverse or Government loans.

Want to know if you're eligible? Visit www.financialstability.gov/makinghomeaffordable

Here are the new Matrices, showing the credit score, LTV & property type price adjustments.

Real Estate Investors Get A Break

Fannie Mae announced Friday that they will be changing the rules regarding investment and second home properties. In September '08, Fannie issued a rule which restricted investors to four financed properties when seeking a new Fannie Mae mortgage.

Under new guidelines, effective March 1, 2009, investors will be allowed to have up to 10 financed properties.

From Bloomberg, 2/11

Fannie to Expand Mortgage Rules for Realty Investors
"Fannie Mae, the mortgage-finance company under U.S. government control, will no longer bar real- estate investors from qualifying for its loans if they already own four properties as it seeks to increase housing demand.The company will expand its limit for investor and second- home loans to as many as 10 properties per borrower, according to a Feb. 6 notice to lenders on Washington-based Fannie’s Web site.“Bona-fide, experienced investors bringing significant equity to the table will play a key role in the housing recovery,” Brian Faith, a spokesman for the company, said today in an e-mailed statement."

New guidelines:


25% downpayment
720 min. credit score
No bankruptcies/foreclosures in last 7 years
No delinquencies in last 12 months on any mortgages
6 months liquid reserves for each investment property owned

Let's hope that there are more than a few investors out there who can qualify. And just maybe the rules change will have a positive impact on the national real estate market.

Fannie/Freddie Friday Links

Fannie Mae to Loosen Refinancing Rules (Washington Post 2/06)
"The District company, which accounts for more than 40 percent of the $12 trillion in U.S. residential mortgage debt, is seeking to break a "logjam" in refinancing and allow more homeowners to take advantage of near-record low interest rates, according to Brian Faith, a spokesman for Fannie Mae, which like its rival, Freddie Mac, is under government control."

Fannie Mae sent out email notification of the "enhancements" on Wednesday. Their announcement can be viewed HERE (pdf).

Complexes with many deadbeats may lose out on Fannie Mae loans (palmbeachpost.com, 2/02)
"Yet another barrier to landing a mortgage after the housing crash: Mortgage giant Fannie Mae isn't buying loans backed by condos in developments where more than 15 percent of unit owners are behind on their monthly fees."

Feds say virus plot could have destroyed all Fannie Mae data (USA Today, 1/30)
"The Justice Department says it has foiled an alleged plan by a fired Fannie Mae contract employee to unleash a virus that would have destroyed data on all of the finance company's 4,000 computers on Saturday, the Associated Press reports."

Fixed Mortgage Rates Rise to 5.25%, Freddie Mac says (Bloomberg, 2/05)

Freddie Mac launches plan for high-risk loans (bizjournals.com, 2/04)
"A selected portfolio of higher risk mortgages that are at least 60 days delinquent will handed off to a specialty servicer for intensive attention using Freddie Mac’s workout opportunities."

Freddie Mac to keep borrowers in foreclosed homes (LA Times, 1/31)
"Freddie Mac, the government-sponsored mortgage finance institution, said Friday that it would allow some borrowers whose houses are in foreclosure to remain in their homes as renters. The new policy's direct effect will be modest. Freddie Mac has only about 8,500 properties in foreclosure, and many are vacant. Nationwide, various estimates place the number of homes in foreclosure at more than 2 million."

Fannie/Freddie Friday Links

Freddie Mac: 30-year fixed mortgage rate at 37-year low (MarketWatch.com, 12/18)
"The average rate fell to 5.19% with an average .7 point for the week ending Dec. 18, down from 5.475% last week and 6.124% a year ago."

"... lowest since the survey began in April 1971."

Fast Track Workouts for Delinquent Borrowers with Freddie Mac-Owned Mortgages Underway (MarketWatch.com 12/18)

Fannie Mae, Freddie Mac foreclosures slow-regulator (Reuters.com 12/16)
"Fannie Mae and Freddie Mac, the largest providers of funding for U.S. home mortgages, slowed the pace of foreclosure starts on delinquent loans for the second straight quarter, their regulator said on Tuesday."
"...but loans reinstated by the former's HomeSaver Advance loan program to borrowers jumped to 27,277 last quarter from 16,658 in the second quarter, the FHFA said."

Loan terms can now be modified before you're late (Chicago Tribune 12/19)
"Starting immediately, Fannie Mae—the mortgage giant with an estimated 18 million home loans in its portfolio or in mortgage bond pools it guarantees—will allow borrowers who face imminent financial difficulties to request "early workout" loan alterations, even if they've never been late."

Homeowners Are Rushing To Refinance As Rates Fall (CNBC, 12/18)
I concur.

Grill On The Hill

Former Fannie/Freddie chiefs testified at a House Financial Services Committee hearing on Tuesday (CSPAN Video).






Raines Faults Regulators For Fannie, Freddie Missteps (Bloomberg 12/09)

Fannie, Freddie Ignored Risky Loan Warnings (ABC News 12/09)
Fannie and Freddie Execs Defend Their Decisions as House Members Question Motives

Evading Fiscal Responsibility (op ed from Charlottesville's Daily Progress 12/10)

2009 Conventional Loan Limits Announced

Fannie Mae confirms conventional loan limits for 2009 (Announcement 08-29 issued 11/7/2008)

Limits are unchanged from FNMA's previous announcement on the introduction of high cost loan limits and the elimination of jumbo conforming.

2009 Loan Limits

Fannie Mae's new minimum income doc requirements

Just thought I should reiterate the minimum income and employment documentation requirements coming down the pike. Listed as #5 in Monday's post on the new FNMA guidelines, effective December 13, 2008.

Income & Employment Documentation Requirements (click for FNMA announcement)

• Salary/Bonus/Overtime: The minimum documentation level required will be one current paystub and a verbal verification of employment.
• Commission/Self Employment: The minimum documentation level required will be one year’s personal federal income tax return.

Believe it or not, until recently, many of our files have only required a verbal VOE (salary/wage borrowers) or verbal VOE & independent verification of business address/phone # (self employed borrowers).

MBS WOW!

MBS Update 11/04/2008:

The FNMA 30yr opened up approx. -20bps from yesterday, and by 3:30pm we were up 109bps from the open. That's almost 110bps in a single day, and we're heading higher. This is the largest single day climb since the FNMA/FHLMC takeover in September. The 30yr fixed has improved ~1/4% since yesterday.



We have seen 2-3 rate improvements (depending on the lender) so far today and we might see one more by 5pm. The 30yr fixed was 6.5% last Thursday. Currently we are at 6.125%. What (or who) is moving today's market? Unsure at this point, but obviously buyers have entered the market in a big way.

Do you want to know how mortgage rates are moving? Sign up for our free daily rates email - No obligation.

You can also contact us if you want up-to-date analysis on the MBS market and how it's affecting mortgage rates.

Fannie Mae guideline changes coming

FNMA announced guideline changes on October 16, 2008, effective December 13, 2008.

The changes:

1.) High Cost Area Loan Limits - Phase out of Jumbo Conforming and implementation of Permanent High Cost Area Limits. The general loan limits will continue to be used, although it is unclear if the limits will change. In the past, FNMA increased the limits as home prices rose. But even now that we have seen a 25% decline in the national average home price since peak in 2006, I doubt FNMA will reduce the limits. In fact, some industry groups (including the Mortgage Bankers Association) are pushing FNMA to lift the limits altogether.

Permanent High Cost Area Limits will be a loan feature (add on charge to conforming limit product) instead of a separate product like the Jumbo Conforming. The 2009 High Cost Limits will be announced by the FHFA, expected November 7. Jumbo Conforming will be phased out on December 31, 2008.

2008 Limits:


2.) Bankruptcy policy change - extended the minimum allowable time period between a bankruptcy file date and the date of the credit report from 24mo. to 48mo. The bankruptcy still must be satisfied prior to the date of application.

3.) LTV Eligibility Requirements - new LTV limits for specific transaction types. Most notable:
Primary Residence
** Cashout Refi --> from 90 to 85%
2nd Home
** Purchase/rate & term refi --> from 95 to 90%
** Construction --> from 95 to 90%
** Cashout refi --> from 90 to 75%
Investment
** Purchase --> from 90 to 85%
** Construction --> from 90 to 85%
** Rate & term refi --> from 90 to 75%
** Cashout refi --> from 85 to 75%

Here is the fully updated Eligibility Matrix.

4.) Mortgage loans with interest only feature - interest only period must be for 10 or more years.

5.) Income & Employment Documentation Requirements

• Salary/Bonus/Overtime: The minimum documentation level required will be one current paystub and a verbal verification of employment.
• Commission/Self Employment: The minimum documentation level required will be one year’s personal federal income tax return.

6.) Miscellaneous

• Verification of rental income (crackdown on "buy & bail")- "If the property was formerly a primary residence, a fully executed lease agreement, receipt of a security deposit, and documented equity in the property of at least 30 percent must be provided.
• Disputed credit report tradelines - lenders must confirm accuracy of disputed tradelines.
• Borrowers without traditional credit (no credit scores) - ineligible for interest only loans
  

FNMA requirements effective January 1, 2009:
Homebuyer education for first time home buyers (FTHB) on all MyCommunity Mortgage loans and all borrowers relying on non-traditional credit to qualify.

The rate rollercoaster

Lately, watching the action in the mortgage backed securities (MBS) markets has been like watching a car full of screaming teenagers hang on through the peaks and valleys of a world class roller coaster. In other words, it's been wild ride.

Just since September, we have seen the 30yr fixed mortgage rate fluctuate nearly 3/4 1 percent - between 5.625% and 6.375% 6.5% (stay up-to-date with our free daily rates email).

In normal markets, one can often get a general sense of the direction. Fundamentals can be followed and trends can be observed. But what we're witnessing in MBS is not the gradual inclines or declines of a functioning market. We're seeing wild swings in prices and reversals that occur in a matter of days.

Yesterday, Bloomberg reported on the difference in yields on MBS vs. US Treasuries. Fannie-Freddie Mortgage Bond Spreads Hit Widest Since March. The recent increased spreads have been driving MBS prices down and rates up.

"Agency mortgage-bond spreads have fluctuated since their record drops on Sept. 8 after the U.S. seized control of Fannie and Freddie. The spreads have widened on days when concern mounted that buyers relying on borrowed money including banks and hedge funds will have less demand for the debt -- including the past five trading sessions. Spreads have tightened when investors heeded a government pledge to support the market."

Predicting the direction of mortgage rates with accuracy in a stable market is a difficult task. But in current conditions it's nearly impossible.

So how does how does this translate for consumers? If you have a purchase contract on a home and plan on closing within the next 60 days, go ahead and lock your rate. Waiting for a particular rate that may or may not come is not worth the risk to your plans or your deposit. And the same goes for those who plan to refinance within the next 6 months - take advantage of the current historically low rates. Keep in mind that the average 30yr fixed rate since 1978 is 9.5% (Freddie Mac)

I'm not trying to "talk up my book" (giving advice or making an argument that bolsters one's position). Just pointing out what I see.

Visual evidence:

FNMA 30yr

The Right Man at the Right Time

By now most know about the Fannie Mae & Freddie Mac "bailout". It's been blogged, reported & commented about for months. So if you didn't catch it on every major news channel & site this morning, you will.

While some are questioning whether the largest bailout in US history was really necessary, most (experts) say that it was and the fallout from other options (receivership or equity injection) would have been worse.

Paulson: "We had no choice"


And former Secretary of Treasury John Snow said it best on Squawk Box this morning (interviewed in front of the Rotunda at UVA), "This action was necessary in the face of the realities of the financial markets, the need to stabilize housing and the larger issues of the US economy and it's spill over affects on the rest of the world. So we are where we are, I guess now the question is can we find a good path out of this so that we get a permanent solution coming out of the next congress..."


Realty Check (CNBC) on the the housing market will react.
Questions is, "How much and how soon"
Mark Zandi of Moody's Economy, "It will help the housing market, it won't bring an end to the housing downturn immediately though."


I truly feel sorry for the thousands of employees at Fannie Mae & Freddie Mac. This is like Enron times two. "Fannie Mae’s workers had $116 million in the employee stock ownership plan at the end of 2006. Today, it’s more like $17.5 million. Ouch."

Friday Links

Breaking news on WSJ, Treasury Is Close to Finalizing Plan to Backstop Fannie, Freddie. It sounds more like a major liquidity injection, rather than a plan to "nationalize". Apparently the fact that Fannie & Freddie are very profitable right now isn't going to keep the Feds from intervening. But according to CNBC, Paulson & Co don't have many options.

I guess it's not official until someone comes out with a study and announces it: "Housing Bubble Has Popped". Yeah, I'd say...

Folks, you might want to stock up on a few supplies and batten down the hatches. It's going to get wet & windy this weekend.

On a lighter note-
I've heard of (and seen) homes in which house cats have the run of the place, but this is ridiculous: Bobcats on a bank owned roof (LA Times blog). "Taking advantage of a slump in local real estate, a family of bobcats has moved into a foreclosed Lake Elsinore home, lolling about on fences and walls and riveting an entire neighborhood."

Last but not least (I couldn't help myself)-
A new foreclosure avoidance (scam) book: "Save My House, Save My A**". This is not an endorsement. I haven't read it, nor do I plan to.