In an effort to limit risky borrower behavior, Fannie Mae announced a new round of mortgage guideline changes last week.
Unlike its previous 20-plus updates that raised income requirements and minimum credit scores (among other changes), Fannie's latest guideline tweaks focus on the value of its underlying mortgage assets -- home equity.
Effective December 13, 2008, Fannie Mae will require larger equity positions on some of its insured purchases and refinances.
A few of the updates include:
And, while the above changes represent 5 percent equity increases over the current mortgage guidelines, some of the other updates call for increases of as much as 20 percent.
As we head into the election and Congress mulls over another economic stimulus package we know that getting approved for a conforming mortgage will, in general, be harder come December 13, 2008.
If you're finding yourself on the fence about your next move -- whether it's to buy or to refinance -- consider taking the necessary steps before the guidelines change.
Low, low mortgage rates don't mean much if you don't have enough home equity to get a home loan approval.
(Image courtesy: The New York Times)
Last week, the Dow Jones Industrial Average recorded both its largest one-day point gain and second-largest one-day point loss in history.
Mortgage markets got whipsawed, too.
From day to day, huge rate swings made mortgage rate shopping difficult. It wasn't uncommon for lenders to change pricing 3 times per day.
When the week closed, though, rates were lower than at Market Open Monday, marking the first week of improvement in mortgage rates since early-September.
Last week's constant mortgage rate movement had several causes:
The biggest driver was -- and continues to be -- trader uncertainty.
As measured by the "Fear Index", market volatility reached an all-time high last Thursday. Investors moved into cash positions, selling assets of all types -- including mortgage bonds. This created an excess supply of bonds on the market which drove down prices and, in turn, pushed up rates.
But, there was a demand-side issue impacting rates last week, too.
If you'll remember, the first $250 billion of the government's Rescue Plan was meant to buy bad mortgage debt. Last week, however, those plans changed. Instead, the $250 billion was applied to the balance sheets of the nation's largest banks.
This caused an immediate $250 billion reduction in mortgage bond demand and the reduced demand further depressed prices. Again, mortgage rates rose as a result.
This week, with very little economic data, expect psychology, politics and corporate earnings to drive mortgage rates -- more than 20% of the S&P 500 will report their July-September 2008 numbers.
If earnings are weak, expect mortgage rates to rise on concerns about recession; lately, that has been the market pattern. Conversely, if earnings are strong, expect mortgage rates to improve.
(Image courtesy: The New York Times)
Private Mortgage Insurance (PMI) is a mortgage lender's insurance policy against highly-leveraged homeowners. It's typically required when homeowner equity is less than 20 percent at the time of closing.
With PMI defaults up 40 percent over last year, though, private mortgage insurers are taking big losses.
They're also taking outsized steps to prevent additional claims going forward and that is bad news for low-equity homeowners and home buyers.
The first PMI change new, higher insurance rates.
Like home insurers that adjust premiums after a worse-than-expected storm season, PMI insurers are raising mortgage insurance rates for all homeowners, regardless of credit history. The higher premiums are meant to offset the higher losses.
And, the second change is that some PMI firms are discontinuing coverage for "high-risk" transaction types. This includes purchases of non-owner occupied properties, and cash out refinances above 85 percent loan-to-value.
Both changes, however, point to similar conclusion about home loans: Home equity is increasingly important for today's homeowner.
PMI rates are higher than they were six months ago and the rising number of defaults makes it likely that rates will rise again soon. As PMI rates increase, so does the cost of homeownership for people whose lenders require it.
For homeowners with soon-to-adjust adjustable rate mortgages, the recent banking turmoil worldwide may lead to budgetary pain.
This is because most conforming ARMs made since 2003 are based on a borrowing cost called LIBOR and LIBOR is up an uncharacteristic 2 percent since September.
LIBOR stands for London Interbank Offered Rate and is the rate at which banks lend money to each other.
Historically, LIBOR has tracked the U.S. treasury market, plus a half-percent increase. This suggests that banks are only slightly less likely to default versus the U.S. government.
Today, that spread is close to 4.5 percent.
Since Lehman Brothers failed in September 2008, banks are fearful that their peers will meet a similar fate. Looking at the chart, we can see how LIBOR has responded.
The LIBOR spike is harming homeowners with adjustable-rate mortgages because adjusted rates on conforming mortgages are often calculated by adding 2.250 percent to the current 12-month LIBOR rate.
On sub-prime mortgages, the adjustments are even more steep.
In general, though, as LIBOR rises, household payments rise, too, so if your home loan is adjustable and is due to reset soon, call or email your loan officer to talk about how LIBOR may impact your adjusted mortgage rate and payment.
For many homeowners, it's less expensive to refinance into a new home loan that to just let the adjustment happen.
(Image courtesy: Wall Street Journal Online)
Throughout the feverish activity on Wall Street last week, mortgage bonds sold off with force, driving mortgage rates to their highest levels since July.
It was the fourth straight week in which mortgage rates worsened.
But, with the mortgage markets closed Monday, stock markets rallied to their largest one-day gain in history.
The Dow Jones' gains are expected to push mortgage rates down Tuesday, but not nearly enough to recover last week's losses. The market-wide carnage was mostly the result of a fear that has not been completely removed from investor psychology.
Until that fear is purged, therefore, expect mortgage rates to move on the dual basis economic data and market mentality. This will likely lead to rapid rate changes that will make shopping for a mortgage rate difficult.
This week, look for key inflation data including the Producer Price Index on Wednesday and the Consumer Price Index on Thursday.
Both measure the "cost of living" and reflect on price pressures in the economy. If costs are rising, it's considered inflationary and that tends to edge mortgage rates higher.
In addition, Retail Sales and Consumer Confidence data will be released this week and carefully watched. If either (or both) show strength, markets may interpret the data to be inflationary as well, further adding upside pressure to mortgage rates.
(Image source: The Wall Street Journal)
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