The Federal Housing Finance Authority (FHFA) that supervises the so-called Government Supervised Enterprises (GSE), now including Fannie Mae and Freddie Mac, just announced restrictions that not only weaken Fannie and Freddie's mandate, but the mortgage and housing markets in general. The FHFA just announced that it will no longer allow Fannie and Freddie to purchase or guarantee so-called "non-qualified" mortgages with more than 30 years amortization or that have interest only payments, among other restrictions.
Fannie and Freddie's mission is to "Ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment." So why has it just made a ruling that will restrict their ability to be the most "reliable source of liquidity and funding," and so real estate in general?
FHFA's answer is the "Adoption of these new limitations by Fannie Mae and Freddie Mac is in keeping with FHFA's goal of gradually contracting their market footprint and protecting borrowers and taxpayers," said the announcement.
Yet Fannie Mae and Freddie Mac are the gold standard for mortgage underwriting, with the toughest qualification criteria, which is why these GSEs have the lowest default rates -- some 3.13 percent vs. 6.7 percent for all private label mortgages, as I said in a past column (Saving Fannie and Freddie).
That means first time home buyers and those with lower incomes will have to depend on portfolio lenders for those programs. These lenders therefore tend to use weaker qualification criteria and so either have to keep those mortgages on their books, or who package them into less credit worthy securities.
So Fannie and Freddie are already the most "reliable source of liquidity and funding for housing." There are in fact no other viable mortgage programs to sustain the housing market, in particular. They now guarantee some 90 percent of mortgage originations precisely because private label lenders have not come back into the market, even as housing prices have risen.
FHFA's actual announcement said, "Beginning January 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan that is subject to the "ability to repay" rule if the loan:
• is not fully amortizing,
• has a term of longer than 30 years, or
•includes points and fees in excess of three percent of the total loan amount, or such
other limits for low balance loans as set forth in the rule.
"Effectively, this means Fannie Mae and Freddie Mac will not purchase interest-only loans, loans with 40-year terms, or those with points and fees exceeding the thresholds established by the rule, said its announcement."
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