Fannie and Freddie

Fannie Mae and Freddie Mac- Here's how they work.

Banks loan money to home buyers. The banks then sell those mortgages - assuming they meet certain credit standards - to Fannie Mae or Freddie Mac. Banks then use the money they get from the sale of those mortgages to make new loans. It's a system that provides a continuous supply of relatively low-interest cash so that banks can keep making affordable loans to home buyers.
So where do Fannie and Freddie get the money to keep buying mortgages from banks? They bundle the mortgages they buy from banks and resell them to major investors. They get a good rate of return because, historically, Fannie and Freddie bonds have been considered to be almost as safe as U.S. government bonds.
But as home prices started to drop in many real estate markets, and homeowners started to default on their loans, Fannie and Freddie got caught holding the bag - using their own cash to cover bad loans.


Changes within Fannie and Freddie

Earlier this week, Treasury Secretary Henry Paulson announced that Fannie Mae and Freddie Mac have been placed into conservatorship by the Federal Housing Finance Agency (FHFA). This is the most important event our industry has experienced in the past three years. This is good news for both the mortgage and real estate markets.

This government takeover will be a catalyst for the following changes:

• Immediate reduction in mortgage rates due to the narrowing of Fannie/Freddie yields over Treasuries
  
• Stabilization of credit markets


• Positive changes in investor psychology


• Positive impact on real estate market due to lower rates. When combined with the first-time buyer tax credit, this will stimulate the first-time home buyer market, which will unlock the trade-up market
  
  

New Tax Credit for First-Time Home Buyers

First, let me clarify what qualifies as a first- time home buyer. Under the new housing bill, home buyers who have not owned a home in the last three years will be classified as first-time home buyers. These buyers will be eligible for a tax credit equal to 10 percent of the property up to a maximum of $7,500.

Here’s how it works:

• 
  The credit is $3,750 for married couples filing separately. Unmarried people who jointly purchase a home will be able to divide the $7,500 credit.


• This program is actually a loan, which home buyers must repay over 15 years at zero percent interest beginning in the second year after they purchase the home. A home buyer who qualified for the whole credit would pay an additional $500 in income tax for 15 years or about $41.67 per month. If you should sell before 15 years you will owe the government the remaining balance.


• The credit applies only to homes purchased on or after April 9, 2008, and before July 1, 2009.


• High-income home buyers don’t qualify: Eligibility begins phasing out for single filers with adjusted income of more than $75,000 and $150,000 for joint filers. It completely phases out at $95,000 for singles and $170,000 for married couples filing jointly.

8 Quick Fixes to Increase Value

To attract buyers, sellers must up the ante to convince them that their property offers what many want most — top value for dollar expended. Here are eight fast fixes:

1. Buff up curb appeal.
You’ve heard it before, but it’s critical to get buyers to want to look on the inside. Be objective. View listings from the street. Check the condition of the landscaping, paint, roof, shutters, front door, knocker, windows, house number, and even how window treatments look from the outside. Add something special — such as big flower pots or an antique bench — to help viewers remember house A from B.

2. Enrich with color.
Paint’s cheap, but forget the adage that it must be white or neutral. Just don’t let sellers get too avant-garde with jarring pinks, oranges, and purples. Recommend soft colors that say “welcome,” lead the eye from room to room, and flatter skin tones. Think soft yellows and pale greens. Tint ceilings a lighter shade.

3. Upgrade the kitchen and bathroom.
These make-or-break rooms can spur a sale. But besides making each squeaky clean and clutter-free, update the pulls, sinks, and faucets. In a kitchen, add one cool appliance, such as an espresso maker. In the bathroom, hang a flat-screen TV to mimic a hotel. Room service, anyone?

4. Add old-world patina.
Make Andrea Palladio proud. Install crown molding at least six to nine inches in depth, proportional to the room’s size, and architecturally compatible. For ceilings nine feet high or higher, add dentil detailing, small tooth-shaped blocks used as a repeating ornament. It’s all in the details, after all.

5. Screen hardwood floors.
Buyers favor wood over carpet, but refinishing is costly and time-consuming. Screening cuts dust, time, and expense. What it entails: a light sanding, not a full stripping of color or polyurethane, then a coat of finish.

6. Clean out, organize closets.
Get sorting — organize your piles into “don’t need,” “haven’t worn,” and “keep.” Closets must be only half-full so buyers can visualize fitting their stuff in.

7. Update window treatments.
Buyers want light and views, not dated, fancy-schmancy drapes that darken. To diffuse light and add privacy, consider energy-efficient shades and blinds.

8. Hire a home inspector.
Do a preemptive strike, since busy home owners seek maintenance-free living. Fix problems before you list the home and then display receipts and wait for buyers to offer kudos to sellers for being so responsible.

More Changes with Fannie Mae

Fannie Mae will be releasing a new guidelines for their AUS over the Memorial Day weekend: Version 7.0. Loans submitted prior to Memorial Day with an approval via Fannie Mae’s Version 5.7 will be honored. Fannie Mae is saying that there will be more Expanded Approvals (higher rates) than what we have experienced. I’m not saying that’s good or bad…just that if you’re considering a mortgage, getting approved before the Memorial Day weekend could be to your advantage. Here are just some of the changes:

Loan to values greater than 85%. Private mortgage insurance is no longer considered a “mitigating” factor for higher loan to values. The more equity in the property, the more Fannie Mae smiles upon you (this is a not a change, the pmi factor is).

“Authorized Users” on credit cards will no longer be considered. It was not uncommon for parents to add their child to their credit accounts as an “authorized user”. This may have been done so that the child could have credit available in the event of an emergency (picture a college student away from home). Once people figured out that the timely payments made by the parent (or credit payer) was benefiting the “authorized user”, it didn’t take long for some people to actually sell their credit history on that account by allowing strangers to become “authorized users”.

Debt to income ratios tighter. “In general, the updates to the maximum allowable total expense ration in DU (Desktop Underwriter aka Fannie Mae) Version 7.0 will be more conservative…”

Loan Type/Level of Risk. With Version 7.0, Fannie Mae is associating levels of risk with varios products (from lowest to highest):

• Fully amortized fixed rate mortgages
• Fully amortized 5, 7 and 10 year ARMs
• 6 month, 1 and 3 year ARMs and Fixed Rate Interest Only Mortgages
• Interest Only ARMs and balloon mortgages

Version 5.7 viewed fully amortized fixed rate, fixed period (3-10 year) ARMs as having the least amount of risk with balloon and interest only mortgages having moderate additional risk. Negative amortized mortgages were considered the riskiest…now they’re off the charts.

Condos are now considered a higher risk than single family detached. Version 7.0 views one-unit properties that are not “attached condominiums” as less risk than attached condominiums and two-unit properties. Three- and four-unit properties have a higher level of risk associated than condo and duplex properties.

Bankruptcy, mortgage delinquencies and foreclosures. A bankruptcy needs to be fully discharged and 24 months since the date filed.
If a borrowers credit report shows a mortgage that was reported 60 or more days delinquent in the last 6 months, they will receive a “refer”.
If the borrower has had a foreclosure reported within the last 5 years, they will also receive a “refer”. If the date of the foreclosure cannot be determined, if the foreclosure was filed within the last five years and has not been satisfied, the loan will be declined.

Self-employed borrowers will no longer be considered “an additional layer of risk”! Hey…I have to end this on a positive note!

Expanded Approval is being pumped up. Fannie Mae is anticipating more EA approvals. An EA approval means that the borrower’s scenario is “less than perfect” or some prefer to say “A Minus”. There are different levels of EA approvals (such as EA-1, EA-2, etc.). Expanded approval also come with higher rates than a typical conventional mortgage as it’s risk based pricing.

Guidelines will continue to tighten for a while with Fannie/Freddie and the private mortgage companies. This is again, another reason for people, professionals and consumers alike, to learn all they can about FHA which may be an option to consider over an Expanded Approval and tougher underwriting standards with conventional mortgages.

The National Market Does Not Reflect Local Conditions

I read the newspapers, listen to the news and hear the following from many of my clients and friends: "I'm not sure this is the best time to buy. I've heard prices may get lower." People are scared from all the national media attention.

Let me first say this, real estate is local. Yes, there are many markets in our country where prices are down, even dramatically so. Fortunately, this is not the case in the greater Philadelphia real estate market. Locally,in 2007 we saw, on average, a 2.9% increase in the average sales price. This is good news both for buyers and sellers. Our market did not see the rapid escalation in prices over the past few years like many other areas of the country, such as, Miami, Phoenix, Las Vegas and San Diego; but, locally home prices have increased 29% in the past five years. Therefore we are not experiencing the extreme market correction as those markets are. The greater Philadelphia market remains strong.

Now for buyers, is it a good time to buy? The answer is yes! We now have a wonderful selection of available homes. Interest rates remain at historic lows. We are currently experiencing a buyer's market. How long will these conditions last? Those who wait for the bottom of any market usually miss it on the way up!