Saturday, February 14, 2009

FNMA Wears Flip-Flops! Recants Two Earlier Guideline Changes

Lending is loosening at the top as FNMA tries to put a floor under the housing market

BLOOMFIELD, MI – Happy Valentines Day to Hallmark. Retail sales should have a tiny spike as many Americans will be buying cards, candy and dinners today.

Last week, FNMA announced two changes to their guidelines – they announced appraisal waivers are back and the raising of their limit on the number of mortgages from 4 back to 10.

What’s interesting is that FNMA is just recanting earlier changes they made meant to reduce risk on the mortgages it buys.

Both of these changes are designed to put a bottom under the housing market, but in two different ways.

Appraisal Waivers
The announcement about bringing back appraisal waivers, is meant to allow homeowners a better chance of refinancing to lower their interest rate & payment. Lower payments it is hoped, will lead to fewer foreclosures. Fewer foreclosures will mean a smaller supply of houses on the market, which should eventually stabilize housing values.

As part of the Automated Underwriting System (AUS) process, an Automated Valuation Model (AVM), similar to Zillow, will be accesses to determine a value. No cashout will be allowed, but borrowers will be allowed to roll in closing costs and prepaid escrow amounts.

The only question is how much variance will FNMA allow, between the AVM value and the stated value input in the system? It makes no sense to worry about the AVM value at all. FNMA already holds the mortgage and if the homeowner’s payment is being lowered, it just increases the likelihood of on-time mortgage payments.

I think we’ll see some more changes on this in the near future.

Limitation on Number of Mortgages held by a Borrower
Previously, FNMA had lowered the number of mortgages it would allow a borrower to have from 10 to 4.

With this announcement raising the limit back to 10, FNMA has acknowledged that real estate investors will be needed to absorb some of the supply of houses on the market.

All the families being foreclosed on can’t get another mortgage for at least three years due to credit damage. Real estate investors are now being encouraged to buy more houses to rent to these families. Many of these investors will eventually sell many of these houses to the families renting them.

The requirements are tougher than they used to be, but this is great news for those with a desire to move some of their money out of the anemic stock market and diversify into real estate. Also, anything that lowers the supply of houses will stop the fall in housing values.

The best news about all this is that lending is starting to loosen. Not due to bailout funds, but due to common sense. Let’s hope that trend continues.

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