Further tightening of credit guidelines

For those of us who have been hoping for the credit markets to show signs of stabilization we can keep on waiting.

Freddie Mac announced last week that they would no longer issue or accept underwriting approvals knows as “accept plus” approvals.  These approvals, which were mostly earned by borrowers with high credit scores and large down payments, featured little to no income documentation requirements.  In essence, these were almost like “stated income” loans because the borrower would not have to provide any income documents to confirm the income they listed on their application.

For example, we would expect that an applicant buying a primary residence with a credit score> 740 and >30% down would likely receive an “accept plus” approval.

Freddie Mac’s move to eliminate “accept plus” approvals is another sign that lenders are acting with extreme caution.  Unfortunately this move will also negatively impact many more applicants ability to buy.  However, I would expect that this will also create a niche for a private institution to

You can read the announcement at this link.

Elimination of interest-only fixed rate loans

In another sign of the times Wells Fargo announced today that they were eliminating their 30 year fixed mortgage with interest-only payments for the first 10 years.

Because Wells Fargo is a bellwether in our industry other lenders are expected to follow suit.

Fannie Mae continues to tighten qualifying standards

This morning Fannie Mae released updated guideline changes for conforming mortgages.  This is a sign that we can continue to expect tightening in the area of loan approval guidelines which will make it more difficult for borrowers to qualify for loans in the future. I don’t think these changes will drastically impact most real estate & mortgage professionals core business but for those who tend work with investors and borrwers with less than favorable credit this is not good news.

Here is a summary of the most important changes in my opinion:

-Loan-to-value restrictions for cash-out: Fannie Mae is limiting cash-out refinances on owner-occupied homes to 85% (currently is 90%, FHA still allows borrowers to go to 95%).

-Loan-to-value restrictions for purchase and refinance of investment property: Fannie Mae is restricting maximum financing for purchase of an investment property to 75% (currently 90%).

-Investment property interest rates to increase: Fannie Mae is increasing the margin on investment property loans compared to owner-occupied interest rates.  The margin gets increasingly larger with the loan-to-value but currently investment property purchases carry a rate that is approximately .375%-.625% higher and it looks like the new margins will be closer to .75%-1.50%.

-Maximum number of properties financed: Currently Fannie Mae will allow a borrower to own only 10 financed properties if they want to take out a new mortgage to buy a 2nd home or investment property.  Moving forward this will be restricted to 4.  If the borrower is buying a primary residence then this guideline doesn’t apply although many banks have overriding guidelines that supersede this change.

-Higher minimum credit scores: In the announcement Fannie Mae also said they would be raising the minimum credit scores required to qualify for various loan scenarios.  There are too many to go into detail here but the bottom line is borrowers will have to have better credit in order to qualify for higher loan-to-value loans, investment property loans, & 2nd home loans than before.

Click this link to review the entire announcement.  The timing in which these changes will take affect have yet to be determined but we know it will be no later than December 1, 2008 and probably even sooner depending on the lender.

According to Fed report, banks will continue to tighten

If the Fed’s latest opinion survey is any indication we may not get any relief from continued credit tightening on the part of lenders for some time. 

The Federal Reserve Board publishes a periodic report called the, “Senior Loan Officer Opinion Survey on Bank Lending Practices.”  This report addresses various aspects of residential, commercial, and consumer lending in the US economy.

In the July 2008 report they state that most respondents to their survey (who are representatives of major lenders), “expected their banks to tighten credit standards on all major loan categories in the second half of the year, and smaller, though substantial,…respondents expected their banks to tighten standards in the first half of 2009.”