Government Looking To Reduce Role In Lending
By Paul Esajian on September 23, 2013
Since the government took over Fannie Mae & Freddie Mac a few years back, it has seen a rise in loan applications and closings. Recently announced changes in lending guidelines and programs would appear to be putting an end to that at some point early next year. With nearly two thirds of all loans closed or funded by either Fannie or Freddie last quarter, they feel it is time they pull back and let lenders take on more of the burden. This would appear to be curious timing, as the real estate market is in the midst of a recovery.
The biggest proposed change deals with the maximum limits placed on conforming government loans. Currently, that number is $417,000 in most areas and as high as $625,000 in larger cities like New York and Los Angeles. While this won’t affect many suburban home buyers, the impact will be felt by those in areas where home values have just recently started going up. It is uncertain exactly how much the Fed plans on lowering this number to, but even a reduction as small as $25,000 will have a huge impact.
Once a loan crosses over the conforming threshold, it is then reclassified as a Jumbo loan. Jumbo loans have completely different underwriting and program guidelines. Credit scores, assets and down payments all need to be significantly increased in the presence of a jumbo loan. In some cases, an approval on a conforming loan will not be issued on the same loan that is just $1 over the Jumbo minimum. This would leave buyers scrambling to find a second mortgage or to find private financing to fund their loan. Both of these come with dramatically increased interest rates and fees.
Without this population of buyers, many places that have seen growth and recovery may be back at square one. At a minimum, it will set the recovery back a few months, as the market needs to reestablish itself. There is never a perfect time to make a transition, but the Fed feels the time to lower the taxpayer burden is now.
These changes come just months after the government announced it is modifying their guidelines with the FHA program. The minimum credit score requirement has gone from a 620 to 640. There also is an increase on the upfront mortgage insurance premiums and monthly payment amounts. While they still offer the best option for the lowest down payment (3.5%), this increase in monthly private mortgage insurance has increased borrower’s total debt.
With many FHA borrowers out of the picture, and a reduction of the conventional lending amount, the government wants to see individual lenders return as the primary source of loans. Make no mistake, that the government has benefited from stricter guidelines. Changes have resulted in a lower default number, but now it is time for them to cash out. What lenders do with their new-found power will go a long way in either pushing the housing recovery along or halting it to a grinding stop. By the beginning of next year, new lending practices should reveal our trajectory.