Dec. 11, 2007 - Subprime as we used to know it is OVER!!

If you're home buyer and you have a FICO Score of less than 680 and a down payment of less than 30%, the cost of mortgage money has increased significantly.

Unlike the "subprime" loans of the past several years that have been processed by "subprime departments" of mortgage institutions or brokered to subprime specialists, these loans will be handled routinely. While borrowers with FICO scores of 620 to 680 may not be considered subprime, their scores are "rated" for additional pre-set premiume of from 2% to 3/4%. Further, this "rating" of loans by credit score will encourage many lenders to "push" marginal borrowers into subprime loan instruments as they have often done in the past.

Fannie Mae's most recent report states that the average FICO score for the bundled loans that they buy is 721. That alone indicates a system of "creaming" of loan packages. The new rating of loans based on credit scores alone, is likely to make mortgage financing much more difficult for borrowers with scores of less than 680.

If you think a home buyer with 20% down is a good risk, think again.
The changes in the fees Fannie and Freddie will be requiring of borrowers will, as of March 1, 2008, apply to home buyers with FICO scores of below 680 rather than the former score of 620 or below. Further, and very important, these new fees will apply to home buyers who are putting down less than 30%. That's right, not the traditional 20% required for Private Mortgage Insurance, but 30%.

FOR A $300,000 PURCHASE WITH 10% DOWN:
FICO 620 or below, the premium will be 2% of the amount borrowed and the home buyer will have an additional fee of $5,400.

FICO 620 to 639, the premium will be 1.75% of the amount borrowed. The home buyer will have an additional fee of $4,725.

FICO 640 to 659, the premium will be 1.25% of the amount borrowed. The home buyer will have an additional fee of $3,375.

FICO 660 to 679, the premium will be 0.75% of the amount borrowed. The home buyer will have an additional fee of $2,025.

Of course, borrowers can elect to roll these fees into the mortgage interest rate, thereby raising the interest rate by up to 1/2% or more. Add the higher cost of PMI and it's likely that rates will increase by 1% or more.

HIGHER MORTGAGE INSURANCE PREMIUMS
Sure to follow will be an increase in Private Mortgage Insurance premiums. Some in the industry predict an effective doubling of the PMI costs for conventional conforming loans, those purchased by Fannie and Freddie. On a $300,000 home purchase with a 10% down payment, the Private Mortgage Insurance cost will be about $4,590. Further, many private insurance providers will no longer insure loans with less than 5% down. If your home buyer has a FICO score of 659, their increased cash needs for settlement will increase by about $7,700 or an increase in interest rate to finance the increase cost.

THE AMERICAN DREAM JUST BECAME MORE COSTLY.

RATE SHOPPING AS WE KNOW IT IS OVER.
One thing is for sure. Buyers will find it more and more difficult to shop for lenders with the lowest rate because rates will become much more FICO Score sensitive than before. It will be difficult for any lender to quote a rate without looking at the prospective borrower's credit score. How will this affect the mortgage companies that advertise rates on the Internet??