Fannie Mae and Adjustable Mortgages in the News

April 30, 2010 – Friday- was not a good  trading day. The government brought criminal charges against Goldman on Thursday and every stock was beaten down due to their economic connection with one of the formerly strongest investment banking firms in the world. Did not matter. Banking, investment banking, manufacturing, real estate– all down.

Goldman, a household investment banking giant, had a $240/share stock price in Dec 2008 when Lehman and Bear Stearns started the downslide in the market. Now, at $145/share, the company has lost billions of value for their stockholders and clients. What makes it worse is that their top executives told Congress that they are not responsible for their clients’ decisions.

So, amidst this telltale story of Wall Street greed, you may have missed the small press release that Fannie Mae sent out.

Basically, Fannie Mae said it will tighten lending standards on adjustable-rate mortgages and “interest-only” loans that helped fuel the housing bubble and have led to a disproportionate share of losses for the mortgage-finance giant.

The changes, which will take effect in September, will require lenders to qualify borrowers based on whether or not they can afford potentially higher payments once adjustable-rate loans reset, and will require much more stringent criteria for interest-only borrowers.

During the housing boom, borrowers increasingly used adjustable-rate mortgages with low initial rates to buy bigger homes and banked on ever-rising values to refinance before payments rose higher. When prices stopped rising, more borrowers weren’t able to sell or refinance to avoid higher payments. That sent defaults soaring.

Fannie said it will require borrowers to have credit scores of at least 720 and 30% equity. Borrowers must also have at least two years worth of cash reserves remaining after closing.

For adjustable-rate mortgages that reset within their first five years, lenders will have to qualify borrowers under higher payment levels, using the greater of either the current interest rate plus two percentage points, or the current interest rate plus the extra margin charged by the lender.

If you have the money to buy, just  hope that the markets remain volatile so  that you can find underpriced properties worth purchasing! Good news for investors and buyers.