What Would a Post-Fannie World Look Like?
There’s been a lot of discussion and proposals lately to dismantle Fannie Mae and Freddie Mac. Both GSEs have been poster children for mismanagement and waste of taxpayer’s money—Fannie and Freddie, for example, received more money in their bailouts than AIG did. There is also a lot of discussion about how the HAFA program did not work; you can reference this article in the Wall Street Journal: http://tinyurl.com/4tvfwen; which reports thatless than 1 in 4 homeowners were assisted, all to the tune of a billion dollars.
Some people wonder why so few were assisted—and the simple answer is that it is possible to modify a decent loan, but it is darn near impossible to modify a bad loan. During the early 2000’s loans were being given out like candy at Halloween, to anyone who showed up. Fannie and Freddie were given pressure to expand their sub-prime business, which they did. Sub-prime loans, of course, include those with no credit, poor credit, past bankruptcies, uncertain income (stated income loans were popular), and 100% financing. Then the market tanked. Well, what lender wants to modify a loan on a house which is: worth less today than it was when purchased, and probably less than the loan amount; with borrowers who are behind on the payments; who have poor, or deteriorating credit; whose income has either ended, or is drastically reduced, or never was what was stated? Basically, the lenders sobered up after the big party and said: “We can’t make loans like this!”; Congress sobered up and said: “Maybe we need to end these programs.”
So what would a post Fannie & Freddie world look like? It would look a lot like the world my family business experienced through the 1960’s and 1970’s. I got into the family business in the late 1970’s, when lenders were just beginning to turn to secondary market re-sales of loans. After the extremely high interest rates of the late 1970’s and early 1980’s, when banks were stuck holding loans at 6% and paying 12% on CDs, more banks jumped on the bandwagon of selling loans. Fannie became the “800 pound gorilla” of the lending world. With Fannie, we got: standardized loan application forms; standardized appraisal forms; automated underwriting, and lots of rules, guidelines, and regulations. Because so many loans were simply sold, lenders shrugged their shoulders and said “Okay” when Fannie began accepting loans that the lenders would not have made, if they had to keep the loan and be exposed on it.
A post Fannie world will be one based on sound lending guidelines. We are already seeing this. Lenders want (amazingly!) buyers to have: down payments, verifiable income, decent credit, and they want the collateral to support the mortgage. Most lenders are returning to the time honored Fannie Mae guidelines of 28% and 36%; which are percentages of the borrowers gross income; the 28% (or lower ratio) is the maximum amount the borrower should pay for all housing costs (Principal, Interest, Taxes and Insurance—also known as PITI plus any Mortgage Insurance Premiums (MIP) or Home Owner Association (HOA fees). The 36% (or upper ratio) is the maximum borrowers can have going out for all debts. High debt ratios, therefore, will reduce how much the borrower can spend on the mortgage payment. We’ll have buyers who will have to make some tough choices—the new vehicle, or a house? All those clothes on the credit card—or a house? Exotic vacations—or staycations?
Borrowers who don’t meet these guidelines will be seeking FHA or VA loans. FHA has already dramatically increased their market share of mortgages. With a 3.5% down payment, and ratios of 29% and 41%, FHA loans are easier for people to obtain. VA loans are surging, because the wars in Afghanistan and Iraq have taken reservists and given them enough active duty to qualify, plus the regular enlisted soldiers are also qualifying. VA requires a 0% down payment.
What does it mean for a real estate agent? First of all, you need to understand financing—now! You need to either get a financial calculator app for your smart phone, or an actual financial calculator—and learn how to run it. You will need to learn financing so you can advise buyers who cannot buy now what they have to do in order to qualify for a loan—things like paying down debt, cleaning up credit, saving some money. You’ll need to become conversant with the requirements of FHA—their bywords are “Safe, Secure and Sound” and VA—their bywords are: “Safe, Sound and Sanitary”. If Fannie and Freddie go away, you’ll need to cultivate relationships with local lenders. Long before Fannie introduced the concept of “compensating factors”, local lenders had them. Early in my career, I remember accompanying buyers to a loan application and helping them explain their “compensating factors”, one of which was that they were already making a higher rent payment than the mortgage payment would be.
Finally, I think the days of simply sending the buyer out to get a loan and let you know when they have one are dead, or should be dead. Most savvy agents work with buyers on an exclusive basis. That generally means you have made the consumer your client. In most states, that means that you have created a fiduciary relationship with the buyer—you owe him duties above and beyond the basics of license law, e.g. “be honest, exercise reasonable care and diligence”—you owe him the duties of loyalty, confidentiality, obedience. You should put his needs above all others, including your own. This means that you would never want your client to end up with a bad loan—one from a predatory lender, one that the client couldn’t afford, etc. A post Fannie world will require agents to be more informed and more proactive about every aspect of their buyer’s transaction, and most of all, the financing.
Melanie J. McLane is a broker, appraiser and educator. She covers this topic in her course: “Dollars and Sense”. She can be reached at Melanie@theMelanieGroup.com
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