Mortgage Brokers: Fannie Loan Raise No Help

Mortgage borrowers, who thought higher loan limits for Fannie Mae and Freddie Mac would mean better terms, are getting an unwelcome surprise.

"Closing Bell" host Maria Bartiromo spoke with two mortgage brokers from regions with high home prices.

They said forget Fannie and Freddie -- FHA loans are becoming the way to go for their customers.

Why? Mitchell Ohlbaum, president of Los Angeles-based Legend Mortgage, said the only plus for Fannie and Freddie is the higher limit -- up to $729,500. After that it's all downhill.

Cons

-Manual underwriting vs. electronic
-Lower debt-to-income ratios than traditional conforming
-Only 30 and 15 year products
-No interest only
-Cannot payoff subordinate liens that were not purchased with money
-Pricing is higher than expected

Ohlbaum said he's steering more customers into loans offered by FHA. He said the rates are slightly better, loan-to-value ratios are higher and underwriting is completed electronically.

And at a time when consumers' credit scores are getting "beaten down harder than a piñata," Ohlbaum FHA mortgages don't have as high a threshold as their Fannie and Freddie counterparts.

So what's it going to take to make Fannie & Freddie more competitive?

New Ideas

Fred Glick, president and chief executive of Philadelphia's US Loans Mortgage has some ideas:

1. Permanently raising the limit so there's confidence for investors to buy the paper.

2. Open the market to more FHA originators by changing the requirements(HUD requires mortgage brokers to have a lot of net worth and have a lot of paperwork)

3. The National Association of Realtors is floating around a proposal to give people a tax credit for buying property.

"I think people need to have a grant program, they need cash in hand -- say, 10 percent -- would be a much better way to go and they'd have to stay in the property for a certain amount of time," said Glick.

© 2009 CNBC.com