The Mortgage World is Changing (and not for the better)
Certain types of mortgages are getting tougher to get, and it will likely get worse, possibly as soon as yet this year.
Quick Background – The federal government bailed out Fannie Mae and Freddie Mac (aka Government Sponsored Enterprises or GSEs) 11 years ago, injecting $180 billion into the companies to prevent them and the entire global economy from a complete meltdown. You should care about Fannie and Freddie because they are what make low-rate 30-year fixed mortgages available to American home buyers and home owners.
Since taking over the GSEs in 2008, the federal government’s stated plan has always been to either wind down the two mortgage giants or return them to private ownership, getting the federal government out of the mortgage business. But Congress has not acted, so now the Trump administration has started taking and is likely to taken even more steps reduce the footprint of Fannie Mae and Freddie Mac in America’s housing finance system.
Here’s what’s happened so far:
- On June 5th, Fannie Mae rolled out changes to their HomeReady affordable product which offers even lower rates to moderate-income home buyers. Freddie Mac followed suit shortly thereafter. You used to be able to make up to $82,300 a year and still qualify for the lower-rate programs. Now you can only earn $65,840.
- WHEDA (Wisconsin Housing & Economic Development Authority) was directly impacted by Fannie Mae’s change as well, reducing the maximum qualifying income limits for 1-2 person households from $94,645 to $65,840 for most counties in Wisconsin. WHEDA’s staff estimates this could reduce their business by as much as 35%.
- FHA lowered the maximum cash out loan-to-value (LTV) from 85% to 80%, effective September 1st.
What will probably happen next, possibly as soon as the end of 2019
On September 5th, the Treasury Department released its 53-page Housing Reform Plan aimed specifically at reducing the federal government’s role in the mortgage industry. If Congress fails to implement the plan’s recommendations, the Treasury Department asked Fannie and Freddie’s regulatory to “consider” the following reductions to the types of loans the GSEs will make available through mortgage lenders like Accunet. Their regulator can make that happen by decree, and our bet is that all of the following will occur before the 2020 presidential election and possibly as soon as the end of 2019. A recent Wall Street Journal editorial also encourages the GSE’s regulator to take these actions immediately:
- Increasing the minimum down payment requirements for purchasing a single-family home from 3% to 5%.
- The restriction of, or outright elimination of, cash-out refinances which could also eliminate the ability of homeowners to combine any existing mortgage with a home equity line of credit into one new loan.
- Elimination of loans on second/vacation homes and non-owner occupied homes (i.e. investment properties).
- Elimination of Fannie Mae and Freddie Mac guarantees on 20-year, 15-year, and 10-year fixed-rate loans as well as adjustable rate mortgages (like a 5-year or 7-year ARM).
- Increasing the fee Fannie Mae and Freddie Mac charge to guarantee loans (making them less competitive with loans offered by banks).
So, what does this mean for homeowners and home shoppers heading into the remainder of 2019?
- Get busy on finding your next home (and don’t be afraid to consider stretching for more house than you might need today but would like to have in the future).
- Take care of that cash-out refinance you’ve been thinking about to perhaps improve your home or consolidate debts to streamline your monthly cash flow.
As always, Accunet Mortgage will keep an eye on how the mortgage world may morph going forward. And do our best to translate the jargon into real-world.
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