Fannie Mae Requires Pre-Closing Credit Checks

Home applicants must freeze credit activity or face scrutiny when they go to close on new home purchase loans.  These Gap reports will raise the cost of consumer credit, while ultimately not affecting consumers' need to increase credit lines after home buying.  Traditionally, housing is the driver of American consumer activity, with new homes requiring furnishings, appliances and general improvements in re-sales of existing homes.

Second Credit Checks For Home Buyers: Be Prepared

Megan Mollman, HousingWatch Contributor

 (excerpted below)

Starting June 1, Fannie Mae has a new rule going into effect which requires the lender to check for additional lines of credit, such as a new credit card or a car lease, that a borrower may have obtained that have not been reflected on the credit report over the course of the loan process. 

Tip No. 1: Get the house before the car 

Across the board, mortgage brokers say that opening new lines of credit is the easiest thing to trigger the lender's attention, especially with the news of Fannie Mae's mandate. For example, this means opening up a store card at Lowe's to get a head start on buying some new appliances or paint or leasing a car to have something shiny to park in your new garage. 

Grant Stern, president of Morningside Mortgage Corporation in Miami, Fla., believes car loans are "the No. 1 culprit" in lenders turning down a prospective buyer's home loan. "We always tell people as mortgage brokers, 'Get the house first, then they will give you the car," he says.

Tip No. 2: Don't switch professions (or tax brackets)

Brokers say its not earth-shattering to change jobs in the same field, especially if you are making more money at the new place of employment, but it's complicated when a professional is moving job classifications, for instance, from employed to self-employed, or from a salaried-position to a commission job. "Moving from an employee to a contract basis is a dagger," says Stern, as two years of federal tax returns need to be included with a loan application. "[In this case], it could take three years to get approved for a mortgage."

FHA Raises Insurance Premiums and Credit Standards

The Federal Housing Administration (FHA) announced today that the government wants better credit quality from its low down payment buyers, as well as higher up-front premiums to be paid by all new borrowers who participate in it's Mortgage Insurance Program. In addition, the FHA commissioner David Stevens announced that "seller concessions" - the practice of sellers enticing buyers using the proceeds of realty sales to subsidize buyer's closing costs - would be halved from 6% of the purchase price to 3% after the comment period expires during the summer. The push by President Obama's appointees to modernize the FHA programs and guidelines is focused on averting the kind of loss making claims explosion experienced by the FHA insurance fund during the 1970s.

The credit change to restrict borrowers who have FICO scores of 580 from borrowing more than 90% of the purchase price of a home is not surprising. The minimum down payment on FHA loans currently stands at 3.5% of the value of the purchase. The FHA's rules and regulations were written prior to the wide adoption of the FICO score. The broad use of the FICO credit scoring system was adopted universally during the late 1980s but truly blossomed during the real estate boom, then bust of the 2000s, when lenders went so far as to issue loans solely based on collateral and FICO scores.

Raising the Upfront Financed Mortgage Insurance Premium (UFMIP) from 1.75% to 2.25% increases the costs to borrow for all new FHA loans immediately. The UFMIP is paid by every borrower regardless of down payment, the fee is added to the balance of all FHA insured loans at closing. The borrower pays the fee over 30 years or when the FHA loan is paid off in full. Today's announcement specified that this UFMIP change was a prelude to making a risk-based Mortgage Insurance Program fee scale - which will require legislation to accomplish. The Secretary announced that he will seek a change that will redistribute the UFMIP fees to borrowers with higher risks due to lower equity contributions or lower credit scores.

The reduction in sales concessions from 6% to 3% to pay closing costs, aka the "seller kickback", is aimed at raising borrower's equity ratios in their homes. Government Sponsored Agency loan programs only allow sales concessions greater than 3% when borrowers have 20% down payments. Modern FHA lenders receive generous premiums for issuing insured loans, and the need for 6% of a sales price towards closing costs provided more opportunity to send money to intermediaries, than pay for actual borrowing costs.

The Obama Administration's push to modernize the FHA's programs while their market share explodes has been handled evenly during the last year. The changes are in line with the market's expectations for prudent lending. The FHA's new set of policies should ensure that risk premiums are paid sufficiently to cover losses, as well as to discourage risky real estate transactions at the fringes. High risk loans may account for a small percentage of the insured pool, but likely represent a large percentage of un-reimbursed losses to the government.

FHA remodels condo lending guidelines

Reprinted from: Condo Vultures® Opinion Column  Thursday, 19 November 2009 09:47

The Federal Housing Administration recently released its new condominium lending guidelines, and with the stroke of a pen wiped 29 years worth of dust off of the most sought after lending certification in the country. The new guidelines include a major overhaul to the process by which lenders approve projects and modern requirements, increasing discretion in some areas while providing strong guidance in others. The changes were mandated in HERA Act of 2008 , which moved the statutory source of funding from a condominium only pool into the general housing pool. More importantly, FHA is using this guidelines change to simultaneously improve their standards and process, while eliminating cumbersome red tape that will reward condominiums in good standing that were previously locked out of the pool. The FHA was wise enough to issue temporary guidance simultaneously, allowing new buildings that qualify to sell out their remaining inventory in 2010 and support distressed markets in a responsible way. I believe that this FHA condo program renovation is a great first step in laying a long-term foundation for a recovery of the condominium housing markets. A quick backgrounder on the Department of Housing and Urban Development (HUD) could help clarify the workings of the FHA. The National Housing Act (NHA) of 1934 established the FHA to stem the tide of foreclosures during the Great Depression; prior to the NHA typical home loans were 5 year term loans (interest only) after which the entire principal balance was due in full. The FHA insured loans for up to 30 years, in essence creating the 30 year fixed rate mortgage - the standard loan issued today. The FHA's activities are spelled out (in detail) in the NHA and any activity it undertakes is authorized by that statute. The FHA's revisions are a concrete result of the HERA Act of 2008 enacted by the Democratic Congress and signed into law by President Bush. Back when Section 234 of the NHA was authorized, the condominium was still a novel new method of shared ownership, and Cooperative Housing Corporations were the mature way to distribute ownership in multi-family housing projects. Prior to HERA, the FHA issued condominium loans exclusively under Section 234 of the NHA and single family home loans under Section 203. This entailed different pools of funds, and when sold to investors, different pools of loans, some with condos, some with detached single-family homes. Once the new guidelines are fully implemented, this division will cease entirely, and the FHA will recognize condominiums in a formal way as legitimate single-family residences contained within a multi-family dwelling. The installation of a single approval standard, coupled with modern standards is a boon for all condominium owners. The Full and Spot system confused all parties as to the approval requirements for any particular project. Using the Spot Approval system, buyers had to pay for certifications each time a loan was to be issued, and go through the process as if it was the first time. Even worse, half the questions on the Spot checklist were boilerplate requirements which provided little useful underwriting information. The Full approval process contained major gray areas in important matters such as budgeting and insurance requirements, which had a chilling effect on applications due to the expense and complication applying. The most significant individual guidelines change was the allowance of the Right of First Refusal in condominium documents - so long as this Right does not conflict with the Fair Housing Act. The FHA’s rationale was that violations of the Act are criminal anyhow and many associations have the Right - while few are prosecuted for non-compliance. There are new caps on HOA dues delinquency percentages; however, the prior rules eliminated all buildings with special assessments under Spot Approval. The new Budget review guidelines adopt a Fannie Mae form which can now become the standard for lender communications in the area and only lead to more clarity for all parties. When it comes to matters of process, the removal of the legal certification requirements is quite possibly FHA's greatest slice into housing red tape since 1934. Under the prior rules, a condominium had to hire an attorney to review the Condominium Documents and certify to the FHA that they met a 37-page legal standard, which was drafted in December of 1980 during the waning days of the Carter Administration. Every time I encountered a building with fewer than 100 units and had to inform them that the certification costs alone would run $2,000, it pretty much killed their interest in FHA approval. However, that was after a 6 month-long search to find a practitioner willing to create a specialty in those types of reviews. Lastly, the FHA issued temporary guidelines, which are in effect for the coming year that should help local developers sell units to local buyers in South Florida with financing. Chief among these is the reduced pre-sales requirement in new projects which allows projects with 30 percent pre-sales to earn approval and sell up to 30 percent of their units to financed buyers with FHA loans. Two weeks ago, I visited the HUD Headquarters building on L'Enfant Plaza in Washington, DC to meet with their Condo Standards staff and learn the rationale behind their revisions and presented specific case studies of projects in our approval pipeline - as well as statistics generated by Condo Vultures®. The main topic of conversation was the stigma placed on loans into projects approved with Fannie Mae’s new process. The FHA wisely looked for guidance in the core logic of Fannie Mae's guidelines intended to protect the institutions that back these loans. However, Fannie’s initially stiff guidelines, rapid implementation with little input and then relaxation of the rules created the impression that the whole process was a sham. Now that there is discretion in the standards, the staffers were sensitive to the reality of the situation; that their decisions today will effectively pick winners and losers in the condo market. By issuing temporary rules alongside the new program, it sends a strong signal that the FHA understands the market, and that this is a process with real standards, but open to buildings experiencing temporary dislocations in this market. The FHA was originally created to backstop the national housing market and is visibly providing much needed support to the market, in a responsible fashion. FHA’s handling of the new shift from a rules based statutory condo approval process to a guidelines based process is providing much needed modernization to their programs and leadership to the market as a whole. The updates are modern, well considered and should promote condo lending, while simultaneously protecting the insurance pool from damaging claims in excess of premiums. The improvements to process should result more condominium approvals with lower costs to consumers as well as developers. It’s a credit to the Obama administration that his political appointees and career staff at HUD truly learned the lessons of Fannie Mae's disastrously erratic implementation of the condominium guidelines. These FHA condo updates will really gain traction in the 3rd and 4th quarters of 2010. For the buildings that qualify, they are the light at the end of the longest tunnel.