Starting December 13, 2008, Many Mortgage Approvals Will Require Larger Downpayments And More Home Equity

• In a move that will stymie thousands of would-be home buyers and homeowners, Fannie Mae announced another round of mortgage guidelines changes last week.
  


• Unlike past revisions in which Fannie Mae tightened debt ratio and credit scoring requirements, however, the newest underwriting updates zero in home equity and home buyer downpayments.
  


• This is consistent with the emerging underwriting philosophy that Collateral is King.
  Paraphrasing Jeff Spicoli:
  No home equity, no downpayment, no dice.
  

Effective December 13, 2008, Fannie Mae will enforce the following single-family residence restrictions:

• Primary residence, "cash out" refinances are limited to 85% loan-to-value


• Second home, cash out refinances are limited to 75% loan-to-value


• Investment properties cannot be refinanced without a 25% equity position
  

Each bullet point represents a 5 percent tightening over the previous guidelines.
Now, to be clear, Fannie Mae isn't the only source for mortgage money. The others are comprised by the FHA, the VA, and an innumerable amount of portfolio lenders. To date, these groups have yet to announce similar loan-to-value restrictions.
But, because Fannie Mae (along with Freddie Mac) guarantees almost half of the nation's home loans, it does swing a big stick. Historically, when Fannie Mae gets tight with its money, the other groups tend to follow.
Starting 60 days from now, qualifying for a conforming mortgage will require more home equity than at any time since 2003.
Now, there are a lot of people sitting around right now, waiting for mortgage rates to fall before buying or refinancing their home.
I'd offer a more prudent idea: Just get on with it already.
None of us can predict what where mortgage rates will go. Recession, inflation, whatever -- it's a big mystery. But, we do know with 100% certainty that guidelines will tighten effective December 13, 2008, and it will prohibit Americans from getting access to mortgages.
We know this because Fannie Mae published it on its Web site.
If you're buying a home or in need of a refinance, consider moving up your timeline. If rates fall after-the-fact, you can always try to refinance into something less expensive. But if guidelines shut you out, there's nothing you can do about in hindsight.
If you know you need mortgage money now, just take care of it. Great low rates don't mean a thing if you can't get qualified. And starting December 13, 2008, the qualifying hurdles are going to be raised.

If Your ARM Is Adjusting In November 2008 Or In 2009, You May Be A Victim Of Bad Timing

An adjustable-rate mortgage is a mortgage for which the interest rate remains fixed for some period of time, after which it can change based on some pre-determined rules.
A shared rule among adjustable rate mortgages is the formula by which they adjust.
Expressed as a formula, it reads:
(Adjusted Rate) = (Variable) + (Constant)
For conforming, full documentation mortgages made since 2003, the variable was often assigned to the 12-month LIBOR, and the constant was often fixed at 2.250.
So, to take the formula and apply it to the real world, the adjusted mortgage rate on a resetting ARM is equal to whatever the 12-month LIBOR is at the time of adjustment, plus 2.250 percent.
As the variable in the equation, of course, LIBOR is of paramount concern to homeowners.
LIBOR stands for London Interbank Offered Rate, but the acronym doesn't really matter to homeowners with ARMs. What does matter is that LIBOR is getting slaughtered.
LIBOR is the interest rate at which banks lend money to each other. And, as banks get munsoned worldwide, financial firms are raising LIBOR to offset the risk of their peers going belly-up. Since Lehman Brothers failed last month, LIBOR is up nearly 40 percent.
If you were looking for evidence that banks are nervous about their future, this should do nicely. Unfortunately, homeowners with ARMs are feeling the pain, too.
Last Month: A 5-year ARM adjusts to 5.203 percent
This Month: A 5-year ARM adjusts to 6.308 percent
Applied to a $300,000 mortgage, LIBOR's rocket-ride drains an additional $2,500 from a household budget over the course of a year.
Until order is restored in global banking system, LIBOR should continue to rise. This is bad news for homeowners with ARMs adjusting in November, December, or in the early part of 2009. Mortgage rates will adjust higher, causing pain for homeowners with 2003-vintage, 5-year ARMs at 4.000 percent.
There is some good news, however.
Mortgage rates on most news loans are lower than what an adjusted mortgage rate would otherwise dictate. If you have equity in your home and a good credit score, it may be smart to refinance into a brand new mortgage as opposed to letting your existing mortgage adjust.
Contact your mortgage lender to see which plan fits your best.

For How Long Is Your Mortgage Rate Quote "Good"? Try 3 Hours and 51 Minutes.

Exhibit A: Wall Street investors are making life difficult for mortgage rate shoppers.
It used to be that mortgage lenders issued pricing on a Monday morning and those rates were good for the entire week. Rate shopping was easy back then because everybody could take their time.
Today, not so much.
Because Wall Street has been somewhat manic lately, mortgage lenders have had to publish mortgage pricing -- on average -- 2.07 times per day since August. That's more than 10 times per week.
Mortgage rate shoppers have been caught in the crossfire because many are unaware of how quickly the ground is moving beneath them. The classic story is the homeowner that "wants to sleep on it", only to find that rates moved a quarter-percent overnight. Changes like that happen more often than you think.
See, all year, stock markets and bond markets have been fighting over the same investment dollars and it's making mortgage rates act like crazy.
Mostly, this is happening because Wall Street has not been real strong on moderation this year -- it's either everybody in, or everybody out.
This lemming-like behavior has led to the highest levels of volatility in market history.
So, for rate shoppers, just being aware of what's happening on Wall Street is half of the battle. When there's encouraging news about the economy, stock markets tend soar at the expense of bond markets, including the mortgage-backed bond markets. This is bad for mortgage rates and pushes them higher.
Then, in the other direction, when there's discouraging news about the economy, stock markets tend to tumble and bond markets tend to do quite well. This is good for mortgage rates and helps them ease lower.
Shopping for a mortgage is a complicated process. It didn't used to be, but it is now. In addition to mortgage guidelines that disqualify new groups of "fringe borrowers" weekly, mortgage rates are highly volatile and extremely unpredictable. And to add another layer of uncertainty, mortgage lenders are closing their doors and loan officers are leaving the business.
What good is a great rate is your lender won't be there to close it?
In a market like this, a piece of solid advice is to saddle up with a lender you trust instead of looking for the absolute lowest rate and fee combination. It's important to save money but one of the little secrets of the business is that good lenders are usually among the cheapest to work with anyway.