By Jody Shenn
NEW YORK - Fannie Mae, the largest source of money for U.S mortgages, told lenders that it’s tightening some of its qualification standards for people buying homes or refinancing loans.
The changes include a reduction of the maximum loan-to- value ratios for some adjustable-rate mortgages to 90 percent, from as much as 97 percent, and an increase in required credit scores for certain loans, the Washington-based company said yesterday on its website. Fannie Mae also will start demanding more tax returns from self-employed borrowers, according to Matt Hackett, underwriting manager at New York lender Equity Now Inc.
“This can knock a decent portion of borrowers out of the picture who had a rough year in business two years ago,” Hackett said of the tax-information demand, tied to an update of its underwriting software used by originators. Two years of personal and business returns will be required to verify incomes, up from one year of personal returns. “You’d be surprised how much of an effect this has,” he said.
Tougher guidelines from Fannie Mae, which along with smaller rival Freddie Mac guarantees mortgage-backed securities financing about two-thirds of new loans, may add to challenges for a housing market that’s showing signs of recovering after a six-year slump. Pacific Investment Management Co., manager of the world’s largest mutual fund, said in commentary yesterday that while “record-tight” credit standards are impeding real- estate sales, they “will not last forever.”
Sales of existing homes rose 2.3 percent to an annual rate of 4.47 million in July from an eight-month low, National Association of Realtors figures showed today. The median forecast of 73 economists surveyed by Bloomberg called for an increase to a 4.51 million rate.
Andrew Wilson, a spokesman for Fannie Mae, declined to comment on the changes to its standards, most of which will start being applied in October. The company told lenders that the adjustments were part of regular reviews of data and loan performance.
The firm, which along with Freddie Mac has tapped almost $190 billion of U.S. capital since being seized in 2008, will need to provide annual reports on actions they are taking “to reduce taxpayer exposure to mortgage credit risk.” The requirement is part of changes to the companies’ bailouts agreements the Treasury Department announced Aug. 17.
Fannie Mae’s tightened standards include an increase of minimum credit scores for adjustable-rate mortgages not vetted by its Desktop Underwriter computer software. Scores will need to be at least 640, up from a previous minimum of 620, on a scale ranging from 300 to 850, according to the memo. It is also eliminating a policy that provided lenders the flexibility to accept scores 40 points below its normal requirements for specific products if borrowers had other strengths.
Changes to its guidance on so-called underwriting exceptions also will eliminate the concept of a “benchmark” ratio between borrowers’ income and housing costs of 36 percent, according to the memo. Instead, 36 percent will be the “stated maximum,” though the ratio can be as high as 45 percent if the borrowers meet credit score or cash reserve thresholds.
The new approach “provides more transparent requirements with regard to how compensating factors must be applied,” Fannie Mae said.
The company will end its FannieNeighbors product that offered underwriting flexibility for borrowers in so-called underserved areas. The loans were part of a program that also offers the aid to low-income individuals or public safety, education, military and health-care professionals.
Borrowers without traditional credit will be limited to loans for one-unit homes that they plan to live in, and the company will no longer accept “exterior-only” property appraisals for mortgages run through its computer software.
Fannie Mae is loosening some standards, according to the memo. The loan-to-value ratio allowed for some fixed-rate loans on two-unit properties will increase to 85 percent, from 80 percent. Down payment requirements also will fall for certain co-op loans, according to the document.