Fannie Mae issued a press release on Apr. 30, 2010 announcing new standards for the purchase and securitization of adjustable-rate mortgage (ARM) products and interest-only loans. Freddie Mac meanwhile announces that from around Sep. 2010, all interest-only loans will be eliminated completely.
Fannie Mae Still Offers Interest-Only Loans at 30% of the Sale Price
New guidelines are being introduced by Fannie Mae with regard to interest-only loans and adjustable rate mortgages or ARMs. After August 31, 2010, all loans must meet new guidelines set forth which for an interest-only loan, means a 30% down payment on the price of the sale and the requirement that borrowers have enough assets to cover 60 days of living expenses.
For ARMs, Fannie Mae will require that borrowers be qualified at the greater of the note rate plus 2% or the fully indexed rate (index plus margin). What this means for potential homebuyers is that mortgage lenders will now have to take into consideration how high a homeowners repayment might become once special introductory rates have expired.
Senior Vice President of Single Family Credit Policy and Risk Management at Fannie Mae Marianne Sullivan says the goal is to, "Make sure consumers can sustain their mortgages and remain in their homes over the long term, while helping our lender partners offer a range of mortgage products for qualified borrowers." Fanniemae.com; (Apr. 30, 2010; accessed May 03, 2010).
Freddie Mac Abolishes Interest-Only Loans
Back on Feb. 25, 2010, Freddie Mac announced that around or on "Sep. 01, 2010, the company will cease purchasing and securitizing interest only mortgages, including Freddie Mac Initial InterestSM fixed-rate and adjustable-rate mortgages." Freddie Mac by the end of 2009, faced an interest-only delinquency rate of 48% and unpaid principal balances of almost $130 billion. Freddiemac.com (Feb. 25, 2010; accessed May 03, 2010).
Both companies have been accused of causing the current subprime mortgage crisis and both are paying for it with high levels of mortgage default. The housing boom of recent years saw new mortgage loan creativity that included interest-only and adjustable rate mortgages and homebuyers that previously could not qualify for a home, now did so under so-called "creative financing."
Unfortunately many homeowners failed to negotiate or understand the consequences of this creative financing, which in the case of ARMs and IO mortgages, appeared attractive because of an initial low or "teaser" interest rate bestowed upon the loan for a number of years. Once the teaser rate expired, interest rates rose so significantly that the monthly payment for many homeowners became unaffordable.
Fannie Mae and Freddie Mac are at least now taking responsible steps to avoid potential future delinquencies, although it took financial loss on their part to implement these changes. Admittedly, these government entities cannot solely be blamed for the current crisis; all companies must be competitive to survive and in a period where mortgage lenders were readily wheeling and dealing in home loans, the blame has to assigned equally.
The new standards are a positive stepping stone in the right direction though despite borrowers being able to only qualify based on current interest rate levels. Fannie Mae will need to adapt and change the standards if and when interest rates change.
Meanwhile qualifying for a mortgage or refinancing a home will remain a tough prospect for some time for homebuyers, but for those that can qualify, getting financing and refinancing without equity is still a possible option and the government's new short sale program may help homeowners avoid foreclosure.
Elizabeth Batt - Elizabeth Batt is a former large animal nurse, certified NREMT, lover of equines and conservationist.
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