Sunday, June 1, 2008

How big of a deal is the Fannie Mae and MI changes?

I'm trying to predict how big of a change Fannie Mae underwriting changes will have on the housing market. They seemingly loosened up a bit with the dropping of the declining market policy which required 5% more down in a market deemed declining. But the mortgage insurers (MI) have tightened on June 1st as well, increasing fees and decreasing LTV and loan amounts for restricted markets.

I think the most important lines in the Fannie announcement were:
No longer consider the existence of mortgage insurance as a mitigating risk factor when evaluating higher-LTV loans, most notably for the purchase of a one-unit property that will be the borrower’s principal residence.

If they are no longer considering mortgage insurance as a mitigating risk factor this suggest that anything over 80% LTV is going to be very conservatively underwritten. Fannie had been handing out a lot of document waivers, not requiring a full documentation on a full documentation file I would venture to guess that bit would go away. I am guessing they are also doing this to basically say they aren't relying on the MI underwriting anymore or, as we have seen in recent weeks, the very real possibility of a MI company going under.

With this release, the maximum allowable total expense ratio in DU will be updated to take into account certain risk factors contained within the loan casefile. In general, the updates to the maximum allowable total expense ratio in DU Version 7.0 will be more conservative than in previous versions of DU.

The speculation I have seen is that the max DTI has gone from 65% to 55%. Still insanely high if you think about it but a tightening regardless. The MI companies that I have seen generally top out at 45% DTI so for high LTV loans this may be a moot point.

Reduced Approve and/or EA recommendation rates, although the overall impact will vary depending on the mix of business the customer submits to DU.

They are saying that fewer loans will be approved but not quantifying the change.

Here is an example MI change, this was the loosest (as far as max LTV) insurer I saw when looking around:

The top portion is the new matrix for restricted markets, the bottom is the old. The loan amounts for the lowest down payment has dropped $283,000 to $417,000, the credit score dropped from 700 to 680 and they only allow a single unit property at this level. The 10% down payment for a single unit had its credit score raised from 620 to 700.

Holden Lewis found this comment from Fannie's CFO:
Fannie's chief financial officer, Stephen Swad, told investors this month that "we have significantly tightened underwriting and eligibility standards." That trend continues with DU 7.0, which will make a lot of small changes that could add up to something substantial. Or, as Fannie phrased it in a notice to loan officers and brokers,"DU Version 7.0 will include a comprehensive update to DU's credit risk assessment" that will result in fewer loan approvals.

If this change does significantly impact closings we will start seeing it in the July numbers that come out in August. By perusing the broker boards you should be able to tell if it is having an impact on the market before then.

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