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Fannie Mae, Freddie Mac are raising fees, toughening rules for credit scores and down payments

April 20th, 2009 7:10 AM by Lehel Szucs

Fannie Mae, Freddie Mac are raising fees, toughening rules for credit scores and down payments

Under the new guidelines, even applicants who assumed that their FICO scores would get them favorable rates will be charged more unless they can come up with down payments of 30% or higher.
By Kenneth R. Harney
February 15, 2009
Reporting from Washington -- It's not what home buyers, sellers and refinancers want to hear, but they need to know that Fannie Mae and Freddie Mac are increasing their mandatory fees and toughening credit score and down payment rules as of April 1.

Most major lenders already are pricing in the higher fees, effectively raising costs to consumers immediately.

Buyers of duplexes, in which one unit is owner-occupied and the other is rented, will be charged a flat 1% add-on from Fannie, even if they've got FICO scores above 800 and make 50% down payments. Refinancers who take cash out at settlement also will be forced to pay extra -- as much as three points if they've got low credit scores and modest equity stakes.

Both Fannie Mae and Freddie Mac say they are tacking on these fees to counter higher risks and losses associated with certain loan products, buyer equity stakes and credit scores. Declining home values in many parts of the country are intensifying losses for both companies when loans go to foreclosure.

Quasi-private enterprises until last September, Fannie and Freddie now are operating under the control of federal regulators and are bleeding billions of dollars of red ink.

Freddie spokesman Brad German said some of the loan categories and credit risk combinations targeted in the latest round of fees "default at four to eight times" the rate of other mortgages in the company's portfolio. "We have to manage these risks appropriately," he added, and that means pricing them based on the probability of higher losses.

But realty agents, mortgage bankers and brokers are incensed at the new round of fee increases, calling them counterproductive in an environment in which housing needs help, not new impediments. They have begun lobbying Congress and the two companies' federal overseers to scrap the latest add-ons.

Charles McMillan, president of the National Assn. of Realtors, complained in a letter to the Federal Housing Finance Agency, the regulator of Fannie and Freddie, that individual fee increases were not only unjustified but in combination they could also seriously deter home purchases. McMillan said "a borrower with a credit score of 670 making a 20% down payment for a condominium would have the fee raised from 150 basis points [1.5%] to 350 basis points [3.5%] -- more than double" under Fannie Mae's new schedule.

"They're shooting themselves in the foot," said Steve Stamets, a mortgage loan officer in Rockville, Md. With substantial down payments of 20% and more, Stamets said, "they don't need to be that tough" on applicants even if home prices decline slightly more before the cycle ends.

"When consumers with 720 credit scores are being adjusted, there is something seriously wrong with the system," said Harry H. Dinham, a Dallas mortgage company owner and former president of the National Assn. of Mortgage Brokers.

As recently as two years ago, FICO scores in the upper 600s were enough to qualify any applicant for prime financing. Now scores of 720 to 740 are the bare minimum if you're going to escape add-on fees -- and still not good enough if you choose to buy a condo or a duplex.

Where's all this headed? Absent congressional intervention or new marching orders from the companies' regulator, the add-on fees are here to stay. But there's an alternative readily available for just about anyone who wants to avoid the fees: FHA mortgages, where down payments go as low as 3.5% and credit scores are not an issue for most applicants.

kenharney@earthlink.net

Distributed by the Washington Post Writers Group.
Posted in:General
Posted by Lehel Szucs on April 20th, 2009 7:10 AM

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