Realty Check

Fannie's New Down Payment Policy: Hoping Promise Comes True

At face value, I thought wait a minute. How can Fannie actually be relaxing standards in today’s mortgage environment? But it’s not that simple. Let me go back a bit:

Last week, Fannie Mae announced that starting June 1, 2008 it will accept: “up to 97 percent loan-to-value ratios for conventional, conforming mortgages processed through its Desktop Underwriter (DU) automated underwriting system, and 95 percent loan-to-value ratios for loans underwritten outside of DU, in all geographic locations in the United States.”

This is a change from its policy implemented barely six months ago that required higher down payments in markets where home prices are declining.

“We are able to adopt this new, national down payment requirement, even in markets where home prices are declining, because our new automated underwriting risk assessment model…will limit risk layering and assess each loan more precisely,” wrote Fannie’s Marianne Sullivan, Senior VP, Single-Family Credit Policy and Risk Management in a press release.

The whole deal is part of Fannie’s “Keys to Recovery” initiative, which is trying to promote “not just home-buying,” but home-owning. In other words, it’s going to help borrowers trying to refi out of troubled loans. This will apply only to primary residences and only conforming loans (including those that fall under the new temporary conforming loan limits).

So back to my original thought: how can they be lowering down payments when almost everyone out there is blaming the current credit predicament on all those no-money-down loans, and when so many borrowers are upside down on their mortgages because their loan-to-value ratios were so huge that almost any price drop put them that way??

Well, Fannie is claiming that its new underwriting program is going to weed out all that risk. If it does, then I say ok, good on Fannie! They’re at least trying to help, give folks with good credit a chance to get back in the game. I will add, however, that Fannie has also upped a lot of its fees on mortgages, so that might offset a bit of this, still, it’s a step in the right direction.

But then worrying-little-me has to wonder if any “automated underwriting system” can really gauge what’s going on in the big bad world of home ‘borrowership’ these days? The borrowing public is now far more complex than it was in the even recent past because the value of homes, and home loans for that matter, are not what they were, in real and emotional terms.

People are more willing to default and wait for some form of bailout, and even to walk away from their loans. Risk, is therefore comprised of even more shades of gray than previously anticipated. I hope Fannie’s underwriting system is what it promises to be, because in this changing landscape, the less equity involved, the less incentive borrowers have to stay in the game.

Questions?  Comments?