Housing Relief Comes at a Cost: No More Easy Money

Fannie Mae Tightens Loan Criteria for Credit Scores

Fannie Mae's Managing Director, Brian Faith, released a statement on Wednesday that gave notice that at least one of the two government sponsored enterprises (GSEs) that play a major role in the nation's mortgage industry has decided it would be wise to protect its own interests.

Government lawmakers have increasingly focused on Fannie Mae and the other GSE, Freddie Mac, as a big part of efforts to ease the credit crunch. The Office of Federal Housing Enterprise Oversight (OFHEO) recently lifted the loan limit to make it possible for the GSEs to buy what are generally termed jumbo mortgages and reduced capital requirements to enable Freddie and Fannie to purchase more mortgages for their own portfolios.

The public statement by Faith was very general, saying in part:

"As Fannie Mae has expanded its mortgage guaranty business to serve the market's urgent need for stability, liquidity and affordability, the company has undertaken a series of steps to protect borrowers, manage the increased credit risk in the market, and fortify the company's capital position. Among these steps, our company is continually assessing and establishing new pricing, eligibility and underwriting criteria for our business that more accurately reflects the current risks in the housing market and guards against the potential for foreclosure. These changes are incorporated into our underwriting system and include adjustments to credit score criteria, loan-to-value ratios, down payment requirements, accurate valuation practices, and consideration of markets where home prices may be falling."

"Given the current state of the mortgage and housing markets, it is critical for our company to conservatively manage our business and risks through prudent pricing and underwriting, while providing sustainable liquidity to our lender customers and stability to the markets as part of our core mission. We will continue striving to responsibly strike that balance."

However, in a memo to its business partners, Fannie Mae got a bit more specific. Fannie Mae will now require a minimum credit score of 580 for most loans that it buys although it says it will still acquire loans with lower score under certain very limited circumstances. This is not a major change as 94 percent of Fannie's business last year was in loans with scores over 620. It also announced some changes in the maximum loan-to-value of loans it would purchase.

Fannie also said it would lengthen the period needed for borrowers to re-establish their credit history after a foreclosure to five years from four years with, again, some exceptions for extenuating circumstances.

What is most interesting about all of this is that it sounds as though Fannie Mae is prepared to stand its ground and protect itself and its shareholders in the face of demands that it be all things to all forces in the current crisis.

from Mortgage News Daily, April 3, 2008