In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Wednesday, December 12, 2007

We're All Subprime Now, Episode XVIII

by Tanta on 12/12/2007 09:30:00 AM

The Wall Street Journal is troubled by Fannie Mae's recent imposition of a 25 bps "adverse market fee" for new mortgage production. "Mortgage Pain Hits Prudent Borrowers":

Fannie Mae, the giant government-sponsored mortgage investor, last week raised costs for many borrowers by quietly adding a 0.25% up-front charge on all new mortgages that it buys or guarantees. On a $400,000 mortgage, that would mean an extra $1,000 in fees, almost certain to be passed on to the consumer. Freddie Mac, the other big government-sponsored mortgage investor, is expected to impose a similar fee soon, according to a person familiar with the situation.
In a statement, Fannie said the new fee is needed "to ensure that what we charge aligns with the risk we bear." The National Association of Home Builders labeled the fee "a broad tax on homeownership." More than 40% of all mortgages outstanding are owned or guaranteed by Fannie or Freddie.

The fee is the latest in a series of moves by Fannie and Freddie that raise the cost of credit for some borrowers. Late last month, they imposed surcharges that affect mortgage borrowers who have credit scores below 680, on a standard scale of 300 to 850, and who are borrowing more than 70% of a property's value. For example, someone with a credit score of 650 would pay a surcharge of 1.25% of the loan amount for a mortgage to be sold to Fannie. On a $300,000 loan, that would mean extra fees of $3,750. The fee could be paid in cash or in the form of a higher interest rate than
would normally apply.

Fannie also is raising down-payment requirements for loans it purchases or guarantees in places where house prices are falling, which by some measures is most of the country. In these declining markets, lenders will need to cut by five percentage points the maximum percentage of the home's estimated value that can be financed. For instance, for types of loans that Fannie normally would allow to cover up to 100% of the estimated value, the ceiling now is 95% in declining markets.
"A tax on homeownership." I swear, if the National Association of Builders didn't exist, I'd have to invent them. For comic relief. Ditto with "a higher interest rate than would normally apply."

Here's the deal: if you are taking out a mortgage--any mortgage--in a period of time in which home prices are rapidly falling, the financial future of lenders and builders is uncertain, and bailouts are already on the table, you may wish to call yourself "prudent" because you're getting a conforming fixed and your FICO score is better than those subprime people's. You may, therefore, feel sorry for yourself because you'll pay that extra quarter.

Or, you can wonder if maybe you should wait that extra half-hour after lunch before entering the swimming pool. Whatever. I'd like to hear the case for the GSEs backing off on fees right now.

In the interests of maximum nerdage, I'd also like to point out that the "no maximum financing in a declining market" rule that is mentioned here is not "new." It has always been the rule. Fannie and Freddie are taking the opportunity presented to them by current events to remind everyone that it is still on the books. Some people may think it's new, but some people think a "declining market" is, well, new. Unheard of. Not normal, you might say.

We should note that this rule does not simply change a 100% maximum to a 95% maximum. There are many maximum LTVs, depending on occupancy, purpose, FICO, property type, loan type (fixed versus ARM), and so on. So there are those 90% cash-outs that will be 85% cash-outs, and those 80% multi-unit loans that will be 75%. Cue more howling from the "prudent."