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Fannie and Freddie Get a New Boss – Part II
September 10th, 2008 categories: Real Estate Finance
On Tuesday, I wrote about how Fannie Mae and Freddie Mac are now under government control. Here’s a bit more on how I’ve seen clients being affected….
In early July, I had a client considering a bridge loan along with a $1,000,000 loan. Although the debt to income ratios were a little high, we
were able to get an exception given the borrowers compensating factors, namely great credit and ample assets. Fast forward to September, and we can no longer get that same exception. Lenders are tightening the guidelines for jumbo mortgages and increasing down payment requirements.
The secondary market lost its appetite for jumbo mortgages earlier this year. Many lenders began to slowly pull out of the jumbo market and began to focus on conforming and FHA loans that could be sold on the secondary market.
Lenders that continued to offer jumbo loans, tended to do so as a “portfolio product.” Portfolio means that the banks are lending their own money under their own guidelines and are not necessarily underwriting from the secondary market guidelines.
While lenders tend to maintain the servicing on these loans, they still sell off a portion of the loans to free-up liquidity so they can continue to make new loans. Since the secondary mortgage market is not buying a lot of jumbo loans, the lenders portfolio’s are full. They do not have the money to keep lending unless they are able to sell a portion of their portfolio. As a result, the lenders are making new loans that are attractive to
investors by raising the required down payment, raising reserve requirements, and increasing interest rates to provide a yield attractive to investors.
This will sort itself out and I think we will see improvement in the jumbo mortgage market in 6 to 8 months because the jumbo loans being made right now are very good, solid loans at relatively high rates of returns. They are a good investment.
It will take 6 to 8 more months for the “bad” loans to cycle through. With the elimination of stated income and no asset loans, investors can feel
confident that the loans they are buying going forward truly are good, solid loans. Once the secondary market regains its appetite for jumbo loans,
rates will come down and liquidity will increase.
As always, I am sure this is a lot of information to absorb. Please feel free to email me with questions any time. If you take anything away today, be
encouraged.
Lower interest rates may be the push get off the fence and make a move now, rather than later. And while it is mostly conforming money that is so
attractive now, keep in mind that if buyers in lower price points can now sell their homes, they become move up buyers. There are lots of creative
options for sellers trying to sell a high price points–maybe an interest rate buy down or a seller carry back.
The housing market will most likely begin to stabilize more quickly as interest rates drop and guidelines potentially ease. Many have argued that
the financial markets hit their bottom in July. While the government’s action certainly is no “silver bullet,” it does appear that the worst is over.
Lysa Catlin
CMC Finance
858–456–3000
These headlines are starting to sound like a bad movie title: like Freddie and Frannie Go To Hollywood.
Sam,
I suppose that’s true, but then again, you can pretty much take anything and turn it into a movie title – Sam Chapman Goes to the Moon. But yes, there’s a lot going on in the industry and it’ll be interesting to see what happens.
The good news is, people are still buying(mostly short sales and foreclosures) and the sooner we exhaust that inventory, the sooner we’ll see prices begin to rise.