Fannie Mae and Freddie Mac are too big, and changes are coming.
Beginning on January 10th, the new QM rules take effect – limiting the debt-to-income ratios to 43%, and capping points and fees charged by lenders to 3% of the loan amount.
Because lenders will be subject to repurchasing any mortgages that don’t comply, some lenders are talking about limiting the DTI to 39% to provide a margin of error.
In the past, borrowers with compensating factors have been able to stretch their D-T-I ratio as high as 50%. Now they won’t.
Is it a big deal?
It is for lenders, but to home buyers and sellers all it means is that there will be fewer people in the buyer pool for each house for sale. Buyers may need to lower their sights, which will make the cheaper homes in each market more competitive.
The other change is how Fannie/Freddie will add more fees depending on your down payment and credit score. It is rather arbitrary too, where borrowers with 680-740 FICO scores get hit the worst. They can look forward to a nasty choice; to pay 1/4% to 3/4% higher in rate, use a 30% down payment, or manipulate your credit score downward to pay less fees.
The gritty details can be found Here.
For home buyers who are looking for more to reasons to stay on the fence, this is a truckload of fun. But for the highly motivated buyers (the ones making the market), all it means is being more determined to fight for the best deal you can find, and hope that home prices will reflect the new era.
For anyone selling a great house on a great street, these changes won’t mean a thing. For those trying to sell an inferior home for retail-plus, don’t be surprised if 2014 brings a more-measured response.
I’m all in favor of 20% down, and not loaning to deadbeats, but that rate table (in the link) is bizarre.
and a FICO 800+ definition of “not a deadbeat” seems pretty restrictive. I wonder how many buyers meet that definition?
I’ve never seen it in writing where the goal was to penalize the decent-to-good credit, and let those with crappy credit slide. Isn’t the point of credit ratings to encourage people to be good payers?
The unintended consequences will be people deliberately harming their credit to get out of the penalty box.
After all we’ve been through, I guess nothing should surprise us any more.
I still see 43% debt to income as generous but realistic. Even 39% isn’t bad. I’d say 40% is the norm in coastal California.
Jim the Realtor wrote:
Seems like one more government handout for deadbeats to me. Let people with higher credit scores pay more for lower fees of the “underprivileged”.
It seems that Mel Watt who is the new head of FHFA (the regulator of Fannie and Freddie) has put the new fees on hold until he can study them further. These fees were imposed by the outgoing head of the FHFA, not by the companies directly.
That article is so badly written I could not figure out what is really going on. Just look at the real LLPA table here:
https://www.fanniemae.com/content/pricing/llpa-matrix.pdf
See the bottom of page 2 and top of page 3, it has a comparison of LLPA fees before and after March 2014. The article Jim linked gives the difference between these tables, which makes it look like it is advantageous to have a lower credit score. This is wrong, lower credit scores still face higher fees, there is no reduction in fees for borrowers with lower credit scores.
Thanks Jeremy, that’s a relief!
It does look like Lyle is right, and Mel Watt will be putting these new fees on hold until he can review them.
Debt-to-income ratios will NOT be limited to 43%. They are only limited to 43% on a NON QM loan that is a “manual underwrite”. If a loan gets a DU approve eligible, ratios on FHA can still go up to 55% and conventional 50%. It’s only loans that don’t get a DU a/e that are stuck at 43%. Jumbo loans for example (since not FHA or fannie/freddie) will be limited to a 43% max DTI. Folks, nothing is really changing, this is pretty how it always has been. Much ado about nothing.
Thanks hj. It sure must be a slow week/month for real estate news because they are talking about this like it will be the end of the world.
They always overreact and over-analyze this stuff. It was the same way in 2011 when a lot of Dodd Frank went into effect, people acted like it was the end of the world. Really much ado about nothing.