Fannie Mae is updating its underwriting guidelines in what seems to be an attempt to reduce lending risks. While this policy is probably good for people involved with Fannie Mae, it does have some consequences in my opinion for buyer’s and seller’s out there.
In my opinion this will probably cause more short sales and potentially stop people from selling, specifically owners of condos. Some of the new underwriting guidelines will more then likely result in less people being qualified or able to purchase a condo. And ultimately if there are fewer buyers, prices will go down due to the more stringent underwriting guidelines.
That’s why I believe that these new guidelines will result in more short sales as owners continue to see values on their units drop. Owners with equity may be forced not to sell because the potential buyer pool is limited even more resulting is a lower price due to lower demand.
Buyer’s are also going to possibly have to look harder to get qualified for a loan. While extremely loose lender standards got us into this mess, overly excessive underwriting guidelines are not helping. We are seeing many more buyer’s in the market then there is quality inventory. These new guidelines could potentially knock some buyer’s out of the market if one of their only options was a Fannie Mae backed loan.
Among the changes coming Oct. 20 to Fannie-backed loans:
— Condo buyers who have less than a 20 percent down payment will have to complete a two-page condo questionnaire about the homeowner association’s finance goals as well as provide additional documents, such as a reserve study, by-laws, and a copy of the master insurance policy. Currently, only condo buyers who put down less than 10 percent are required to produce the extra paperwork. Some analysts predict that the extra paperwork could lead to more chances of loans being denied from Fannie’s strict condo loan underwriting criteria.
— Fannie announced it will end discretionary approvals or “Expanded Approvals” for all Fannie Mae refinances, except for Fannie Mae’s Refi Plus Program loans or HARP loans. EAs were believed to help borderline borrowers qualify for a mortgage when they didn’t have a perfect combo of loan-to-value and debt-to-income ratios, creditworthiness, and financial reserves, Realty Times reports.
— Self-employed borrowers also may face more hurdles in qualifying for a Fannie-backed mortgage. Fannie will require self-employed borrowers to provide two consecutive years of federal tax returns, instead of one, the current standard. Underwriters will base income on an average from the last two years of tax returns, Realty Timesreports.
“Because of the new two-year average approach, one bad year out of two could sink a self-employed home owner’s application even if the most recent year would have qualified him or her under the old rules,” San Jose, Calif., mortgage lender Shashank Shekhar writes for Realty Times.
Source: “Fannie Mae Tightens Underwriting Rules for Condo, Refinance Loans, Borderline Borrowers,” Realty Times (Oct. 3, 2012)