Freddie and Fannie's Woes Means Higher Costs For Borrowers

Freddie Mac and Fannie Mae, the two government-sponsored companies that buy most mortgages issued by United States lenders, are clamping down on the type and quality of the loans they buy. They are demanding that borrowers have larger cash reserves, better credit scores and second home appraisals. In addition, they have doubled the fees they charge to many lenders in an effort to raise revenue. The result is that borrowers can expect higher interest rates, more fees and closing costs, bigger down payments and fewer loan choices.

Fannie Mae announced that it will no longer purchase "Alt-A" loans. So someone with less-than-perfect credit or with less than a 20 percent down payment will have difficulty finding a lender. In addition, the increase in lender fees will be passed on to the borrower. For a $300,000 loan, that could work out to an extra $750 in closing costs.

If you want to refinance your home, you have the double whammy of a decreased home value and an increase in lending requirements. Even those with excellent credit will not be able to take cash out of their home if, after the loan, they have less than 15 percent equity in the home. Previously, the threshold was 10 percent. And if your credit score is low, refinancing will be next to impossible.

Meanwhile, Freddie and Fannie's stock prices continue to fall. This instability makes investors shy away from putting funds into the lending industry, which further limits the funds available to lend. There is talk of a government bail-out, but nothing is settled. And until things stabilize, there is little hope that this tight lending environment will change.

Option ARMs a Headache for Lenders

Countrywide Financial Corp. said in a regulatory filing Monday that the average borrower with an option adjustable-rate loan now owes 95 percent of the value of his home, up from 76 percent when the loan was made.

Seventy-two percent are making less than full interest payments and 12.4 percent are at least 90 days delinquent. The average FICO credit score has dropped to 680 from an original 715. The U.S. median is 723.

Bank of America has said about 66 percent of the option ARMs went to California and Florida borrowers.

Bank of America is not the only big lender with option ARM headaches.

Wachovia Corp said borrowers in its $122 billion "Pick-a-Pay" option ARM portfolio owed 85 percent of what their homes were worth on June 30, up from an original 71 percent. In California's Central Valley, the average was 109 percent. The average overall FICO score was down to 661 from 675.

Source: Reuters News, Jonathan Stempel (08/12/2008)

US Homes Selling - But Not Necessarily to Us

Someone has figured out that US real estate is a real bargain. But that "someone" may not be from the US. From May 2007 to May 2008 it is estimated that between 150,000 and 190,000 US homes were sold to foreign nationals. The combination of the weak dollar and the decrease in home prices has made our real estate look like quite a deal to foreign buyers.

Purchases were made throughout the country, but the most popular states for international buyers were Florida, California, Texas, Arizona, New York, Washington and Nevada. The top six countries of origin for foreign home buyers were Canada, the United Kingdom, Mexico, China, India and Germany. This year, Canada replaced Mexico as the country with the largest share of foreign buyers in the U.S.

Typically, these buyers are looking for a vacation home. Ten percent pay all cash. And they tend to buy more expensive homes. More than 14 percent of properties sold to international buyers sold in excess of $750,000. Foreign buyers also show a greater preference for condos and townhouses compared to domestic buyers.

The Next Wave of Defaults?

Just as defaults on sub-prime loans are showing signs of diminishing, a new wave of lending problems may be about to hit. Defaults by homeowners with good credit are on the rise.

Many of these borrowers have interest only loans, commonly referred to as "option ARM" loans. When these loans adjust, the borrower is required to make payments that includes interest plus principal. Unlike sub-prime loans, which typically adjusted upwards after two or three years, these option ARM loans usually had a five to seven year period before the borrower was required to pay both principal and interest. For many, that grace period is now coming to an end.

Even if a borrower's interest rate remains unchanged, the additional principal payment (on top of the interest payment) could mean an increase of 50% in the monthly payment. Because lending requirements have tightened and home values have declined, these borrowers can not refinance their loans. And with property values down, some homeowners can not sell at a price that will cover the loan amount.

Lenders are starting to see defaults on these loans, and there is concern in that as these option ARMs adjust, a new flood of delinquencies will hit the banking industry.

It's Not Much, But At Least It's Something...

In an effort to try and encourage loan servicers to work with borrowers who are trying to modify their loan payments, Freddie Mac has set up a rewards program for servicers who successfully renegotiate Freddie Mac-owned loans.

Starting today, Freddie is paying servicers the following:

$500 for each repayment plan;
$800 for each loan modification; and
$2,200 for each short sale.

Freddie also will reimburse a servicer the advertising costs involved in telling borrowers about these options. If the advertising results in the borrower contacting the servicer, Freddie will pay the servicers up to $15 per mortgage for leaving a door hanger, and up to $50 per mortgage for knocking on a door.

It's not much, but it's something. And in these tough times, lenders are looking to make every penny they can. So maybe this will be just the incentive servicers need in order to make them more amenable to working with homeowners.