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.