Fannie Has New Rules for Exotic Loans

Because of all the abuses during the housing boom, government-sponsored mortgage financier Fannie Mae is rolling out some new rules for interest-only and ARM loans. These rules should have always been the common sense standards that lenders stuck to, but the frenzied pace and profits of the rising housing market from 2003 to 2007 helped them forget common sense.

Well, in response to that lack of judgment, Fannie Mae is tightening its restrictions on certain loans. In order to now get an interest-only mortgage backed by Fannie, borrowers must contribute a 30 percent down payment. That is a huge change from during the boom. This large down payment requirement will hopefully ensure that these loans are only going to those they were designed for – the financially savvy- and not to those with low incomes and little understanding of the risks. Interest-only home buyers will also need a credit score of 720 or more to qualify, which is an enormous jump up from the past.

And Fannie will now only guarantee adjustable rate mortgages, when lenders can prove that the borrowers can still afford the monthly payments even if their interest rate rises to either the highest amount possible or the cap rate or to 2 percentage points higher than the original, whichever is higher. Undoubtedly this will keep many people out of the housing market for some time, especially many who would have and did qualify during the boom years.

“Our goal is to make sure consumers can sustain their mortgages and remain in their homes over the long term, while helping our lender partners offer a range of mortgage products for qualified borrowers,” said Marianne Sullivan, Senior Vice President of Single Family Credit Policy and Risk Management at Fannie Mae,as quoted in a CNN online article.

“These policy changes reflect our intention to continue providing liquidity to different market segments by ensuring that support for ARM products remains in appropriate circumstances,” Sullivan added.

These new rule will be effective starting September 1.

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