Fannie Mae Toughens Foreclosure Guidelines

It was bound to happen. With government officials at the local, state and federal levels clamoring to clamp down on the nation’s financial institutions and other loan originators, plus the recent bailout of Bear Stearns by the Federal Reserve after the Wall Street giant became so heavily invested in subprime backed mortgage securities, it was just a matter of time before the Federal National Mortgage Association (better known as Fannie Mae) did something to tighten the reins as well.

Well, this past Monday it finally did. As one of the two main Government Sponsored Enterprises (GSEs) in this country — the other is Freddie Mac — Fannie announced new guidelines that will effect the loans it buys from lenders all over the country, securitizes and then sells to Wall Street investors. In the process, these latest changes will affect potential homebuyers nationwide, but especially any homebuyer who has suffered a foreclosure in the recent past.

“The dramatic shifts in market dynamics over the past several months have prompted us to continually review the full spectrum of our risk appetite, eligibility requirements, automated underwriting risk assessment, and pricing. It is important that we have underwriting and eligibility criteria that foster sustainable homeownership for the borrower,” Fannie said in an official release Monday.

So it looks like Fannie is finally tired of shouldering the burden themselves. They’ve been pretty big shoulders until now. And one of the most dramatic changes that will relieve some the tension in those big shoulders has to do with former homeowners who lost their homes to foreclosure.

Effective June 1, 2008, Fannie will require a potential borrower’s credit history to be free from any foreclosure activity for five years before it will consider buying a mortgage taken out by that borrower. Prior to this announcement Fannie required only four years to elapse before it considered a borrower’s credit history to be re-established.

The time period is shorter for borrowers who can document that extenuating circumstances resulted in the foreclosure action in question. Still, even that period is being extended from two years to three years under the new guidelines.

Elapsed time, in this situation, is measured by Fannie as the time between the application date for the new mortgage and the completion date of the foreclosure action as documented on the borrower’s credit report.

What happens after the five years are up is different as well. Now to obtain a new mortgage on a principal residence requires a minimum 10 percent down plus a minimum credit score of 680.

That’s right. A minimum credit score! Until now Fannie hasn’t required credit scores in its analysis of creditworthiness. With the new guidelines, however, for the first time ever Fannie is requiring credit scores for any and all mortgage loans delivered to it by lenders.

Even in standard situations, without a foreclosure to consider in the mix, the minimum credit score required is now 580. There are only three exceptions to this requirement:

• Manually underwritten loans with non-traditional credit
• Loans originated in limited cash-out situations, or
• Loans insured by an agency of the federal government such as HUD, FHA or VA

Although it does not appear that these new standards will apply to investors, they will make it harder for low-income and first-time homebuyers looking for a principal residence to purchase a home, especially it they’ve had problems with foreclosure in years past.

For real estate professionals, these new guidelines will most likely make it harder for their clients to obtain financing for that bargain property they’re looking to purchase, whether a property in foreclosure, a bank-owned property or even a conventional listing selling at a reduced price.