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Wednesday, April 02, 2008

Fannie Mae Tightens Guidelines Again

by Tanta on 4/02/2008 08:33:00 AM

I struggled over two possible titles for this post: "Fannie Mae: We're All Expanded Approval Now," and "Fannie Mae to Walk-Aways: Don't Walk Back To Us." This is all about Announcement 08-08, which I suspect may get some curious play in the press. (The WSJ has already picked up the story.) It will be curious because there really is a mix here of apparent "loosening" as well as "tightening" of some guidelines, particularly Expanded Approval. My reading is that it's really all tightening, if you know how to read these things.

First, "Expanded Approval" is Fannie-Speak for "near-prime" loans that are run through its AUS, Desktop Underwriter (DU). DU buckets EA loans into one of three categories based on comparative credit quality and risk characteristics of the loan, and each level is subject to a worsening price adjustment. This Announcement seems to suggest some loosening of eligibility requirements on EA, such as allowing loan types or products that were never before eligible for EA, like interest-only FRMs and 5/1 ARMs, 3 and 4 unit properties, and cash-outs on second homes.

Does this mean that Fannie is signalling a willingness to take on more risk in the EA program? I don't really think that's the way to look at it. My guess is that the "standard eligibility" engine in DU has just been programmed to kick a lot of those IOs, multi-units, and second-home cash-outs into EA, where they are identified as high-risk and priced for it. In other words, a lot of loans that once would have gotten the label "prime" are now getting the label "near-prime." (EA isn't really "subprime," although the bottom of the EA pile is probably quite close to the top of the non-agency subprime pile. You can call EA "subprime," if you like, but that does tend to erase the fact that conventional non-agency subprime gets a lot worse than EA.) So, in other words, we're all--or a lot more of us are--Expanded Approval now.

What is unambiguously a tightening comes in for the requirements for loans with a past foreclosure:

The presence of a prior foreclosure action in the borrower’s credit history is evidence of significant derogatory credit and increases the likelihood of future default. The lender should consider the presence of a foreclosure as an added risk element that represents a significantly higher level of default risk. The greater the number of such incidences and the more recently they occurred, the higher the credit risk.

We currently require four years to elapse after a foreclosure before we will consider the borrower to have a re-established credit history. With this Announcement, we are increasing that time period to five years. We will continue to allow a lesser time period to elapse (three years in lieu of the current two-year requirement) for borrowers who can demonstrate documented extenuating circumstances that resulted in the foreclosure action.

These policy changes apply to all mortgage loans delivered in accordance with the Selling Guide, loan casefiles underwritten with DU Version 7.0, or pursuant to any variance contained in the lender’s Master Agreement.

Manually Underwritten Mortgage Loans

• Elapsed time is measured by comparing the application date of the new mortgage to the completion of the foreclosure action as reported on the credit report or other foreclosure documents provided by the borrower.

• After the requisite five year elapsed time period

-The borrower may obtain a new mortgage to purchase a principal residence with a minimum 10 percent down payment and a minimum credit score of 680.

-The borrower may obtain a limited cash-out refinance mortgage pursuant to our eligibility requirements in effect at that time.

-The borrower may not obtain a cash-out refinance or obtain a mortgage secured by a second home or investment property for seven years after the foreclosure action.

• If the foreclosure was the result of documented extenuating circumstances (as defined in the Selling Guide) and the requisite three year elapsed time period has passed

-The same requirements apply as outlined above, with the exception that the minimum credit score of 680 is not required.
If you can actually afford to pay your mortgage payment, you made no attempt to work with your servicer or accept any kind of repayment plan, and your basic reason for walking away from the property was that you just didn't want to be upside down, you will be unable to meet the "documented extenuating circumstances" requirements. Plus, if you are "dragging out" the FC in order to live rent-free as long as possible, you are only extending the time period in which you are not eligible for a Fannie Mae loan again, since this is measured from "completion" of the FC process. In other words, this is aimed at "walk aways."

Loans with excessive prior mortgage delinquencies will not be eligible for delivery to Fannie Mae. Excessive prior mortgage delinquency is defined as any mortgage tradeline that has one or more 60-, 90-, 120-, or 150-day delinquency reported within the 12 months prior to the credit report date.
It has never been any kind of easy to get a loan with recent serious mortgage lates through Fannie Mae, but they've never quite stated it this categorically.

There are a few other changes in FICOs and maximum financing that aren't exactly dramatic, but that are all heading in the direction of increased tightening. I read the whole Announcement as more of a certain message both GSEs have been putting out, of late: "Don't expect us to clean up all these messes for you, guys."