Fannie, Freddie Loosen Rules

Fannie Mae (Federal National Mortgage Association), under increasing attack from Congressional Republicans, has relaxed rules affecting mortgage applicants with bankruptcies and foreclosures on their credit reports. Under the new rules, borrowers can claim a one-time exception for “extenuating circumstances” that will reduce the waiting period after a “derogatory event” from the current four year minimum to two years.

Derogatory events include everything from a pre-foreclosure sale to short sale, deed in lieu of foreclosure, a mortgage loan charge-off, a bankruptcy filing, or bankruptcy judgement. The extenuating circumstances include divorce, catastrophic illness, job loss, or significant loss of income or, in other words, just about anything that may have happened to 66 million Americans since 2008. That’s how many American households have suffered one of those derogatory events during the past six years, and their absence from the real estate market is a major reason for the stalled economic recovery.

Freddie Mac (Federal Home Loan Mortgage Corporation), Fannie Mae’s sister company, also under Congressional attack under an agreement with Fannie Mae.  The two quasi-government agencies work together to establish common guidelines so lenders and borrowers cannot play one company off against the other.  The move may light a fire under the dormant real estate market, which has been a major factor in the weak recovery, according to the  The San Francisco Chronicle.  Fannie and Freddie underwrite the vast majority of the “conforming” loans made in the United States. Conforming loans are those that fit under the federal guidelines for the maximum loan amount for a conventional loan.

The two privately-owned, federally chartered companies were bailed out by the Federal government in the aftermath of the 2008 mortgage meltdown, which has left the U.S. as the principal shareholder in the two organizations. The bailout was an essential element in the economic recovery because Fannie and Freddie provide the liquidity needed to enable the nation’s banks to continue to write mortgages by purchasing previously written mortgages on the secondary market, which gives the banks the ability to write new mortgages with those funds.

Fannie Mae’s move makes the mortgage giant more competitive with the Federal Housing Authority (FHA), which underwrites loans for more low and moderate income homebuyers. Current FHA guidelines only require one year of “seasoning” after an adverse event with extenuating circumstances, and their mortgage have lower down payment minimums (3.5% for the FHA as opposed to 5% for Fannie and Freddie), lower credit score requirements and more lenient debt to income ratios.  The move to ease credit rules is a reaction to the widespread belief that the tighter regulations are strangling the overall economy, according to a published article in The Los Angeles Times.

Interestingly, despite the FHA’s traditionally more lenient criteria, the federally funded program did not suffer the massive number of foreclosures and repossessions that have plagued Fannie and Freddie. The new rules do not, however, guarantee mortgages to borrowers recovering from financial disasters.

In order to qualify for the shorter waiting periods, borrowers must be able to document the legitimacy of their claims that it was the extenuating circumstance, rather than financial mismanagement, that forced the applicants into bankruptcies and foreclosures. One litmus test is whether the homeowner was able to carry their mortgage obligations before the catastrophic events took place. Home owners who over-extended themselves by buying more house than they could reasonably afford may not qualify for the shorter waiting periods. Borrowers with multiple rental properties may also have difficulty under the new rule.

The good news, however, is the lenders are becoming more lenient, which means that more buyers will be in the market, and that equates to more jobs in the construction industry and a stronger economy. The bad news is that, as the number of rehabilitated homeowners increases, the possibility that another mortgage meltdown might occur also increases

The best way to find out whether or not you can qualify for a loan under the new program is to go to your nearest bank and ask them to look at your situation. Face to face meetings are important in this stage of the process because remote lenders – those who work online or via telephone – are more apt to tell you that you are qualified when you really aren’t. You may not want to close your mortgage at your local bank because the rates from online lenders are often better, but you want to start the qualification process there because you are more likely to get a more accurate finding.

Not everyone agrees with the relaxation of the mortgage rules, however. The Reuters News Agency is reporting that the Securities and Exchange Commission (SEC), where some members of the Commission are fearful that the relaxed regulations are setting the stage for yet another mortgage meltdown.  The Commissioners voted to recommend a rule under which the The Federal Reserve Bank will require banks to have  at least five percent of their own funds in the transaction.  This demand that lenders keep some skin in the game is intended to have a chilling effect on more aggressive lenders who often use looser underwriting guidelines than Fannie and Freddie use.

Unlike Fannie and Freddie transactions, the loans that fall under the Fed’s jurisdiction are primarily non-conforming or “Jumbo” mortgages that are packaged and sold as mortgaged back securities on Wall Street, but those where the loans that precipitated the crash in 2008, which is why loosening the requirements on new mortgages is making regulators very, very uncomfortable.   The other side of the coin, of course, is that without those borrowers the weak recovery will continue to be weak.

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