Fannie Mae, public/private purchaser of many residential mortgages announced today that they have revised their guidelines. This means that all conforming loans, the loans that have the lowest interest rates and the best terms, will now have to conform to a new set of standards. The revised guidelines will negatively affect borrowers with low credit scores and borrowers who have had past credit issues. While they did not directly mention a fee increase for the loans they purchase, it is widely expected that they will follow Freddie Mac and add fees for riskier loans.
Credit Score Minimum
Fannie Mae will now only be in the market to purchase loans backed by borrowers with scores of 580 or higher. Previously there was no minimum credit score to secure a conforming loan. This new floor will make it much harder for borrowers with special situations or with credit issues to secure a conforming loan. While this has not been a stated policy previously, the subprime crisis made this a reality over a year ago.
However, this will set a new playing field moving forward. Regardless of how great the market is, people who have credit scores below 580 will not be eligible for conforming loans. Coupled with potential new subprime mortgage legislation, this could effectively remove low credit score buyers from the lending pool completely. Short of extremely high rates, hard money lenders and a significant down payment, it will be impossible for borrowers with low credit scores to obtain loans.
Foreclosure Waiting Period
In addition to creating minimum credit score requirements, Fannie Mae extended the period a borrower must wait to obtain a new loan after a foreclosure from four years to five years. Interestingly, this comes at a time when millions of people are expected to face foreclosure over the next 3-5 years. This could have far-reaching effects on the housing market recovery as well.
This increased waiting period will take a significant amount of buyers out of the market for another year. It also ups the ante for current buyers facing foreclosure. Now buyers have to consider if it is worth waiting an additional year on the sidelines or if they should do more to save their home and their credit. One positive effect of this legislation could be a short-term drop in foreclosures. While it may not be significant, at least some buyers will find this additional year a deterrent to returning the keys to the lender.
Potential for Lower Rates as Defaults Decrease
The silver lining in this legislation is that defaults on the conforming loans will decline. With tighter lending policies, the decline in defaults should more than offset the fee increases. This should result in borrowers ultimately getting better loan rates.