The next shoe to drop in
housing
Rising foreclosures and big losses at
Fannie Mae and Freddie Mac are making
it harder for people with good credit
backgrounds to get a traditional
mortgage.
By Tami Luhby, CNNMoney.com staff writer
Last Updated: March 18, 2008: 3:50 PM EDT
NEW YORK (CNNMoney.com) --The credit crunch has finally hit the traditional mortgage market.
Investors are now shunning mortgage-backed securities issued by government sponsored enterprises Fannie Mae
and Freddie Mac, which have been critical in keeping the real estate market from completely falling apart.
Some fear this development will make it harder for people, even those with strong credit histories, to get a home
loan.
"Even if you have good credit, you don't know if they are going to give you a loan or not," said Joseph Mason, a
senior fellow at the Wharton School of the University of Pennsylvania.
And for those who can still get a loan, the tremors in the mortgage-backed securities market has made loans more
expensive for borrowers. As the prices of mortgage-backed securities have fallen, their yields have risen, leading
to higher mortgage rates.
The national average rate on a 30-year fixed-rate mortgage was 5.96% Thursday, after jumping to 6.08% earlier
this week, according to Bankrate.com. Rates on a 30-year fixed mortgage were about 5.90% a week ago. A
borrower looking for a 5-year adjustable-rate mortgage would pay 5.71% today, up from around 5.03% a week
ago.
"The cost of mortgage financing has increased dramatically and it couldn't come at a worse time," said Tom
LaMalfa, managing director of Wholesale Access, a mortgage research firm. "We're going to see a further
diminishment of available mortgage money."
Not just a subprime problem anymore
Rising defaults and delinquencies effectively shut down the subprime and jumbo mortgage markets last summer,
but borrowers with good credit could still get conventional loans that met the agencies' criteria. That's because
investors continued to buy securities -backed by Fannie (FNM) and Freddie (FRE, Fortune 500) -seen as safe
since they carry an implicit federal government guarantee.
But the landscape changed in late February. Investors were spooked after Fannie and Freddie reported a combined
$6 billion in losses for the fourth quarter as defaults rose.
A new round of fear washed over Wall Street last week when financial fund Carlyle Capital announced its lenders
wanted more money to make up for the depressed value of the agency mortgage-backed securities Carlyle had put
up as collateral for loans. An announcement by the Mortgage Bankers Association last Thursday that defaults had
reached record levels didn't help soothe concerns.
This bad news comes as Congress, in an effort to stimulate lending in higher-cost areas, temporarily raised the size
of the mortgages Fannie and Freddie can guarantee to as much as $729,750.
The situation has grown so worrisome that the Federal Reserve took several steps this week to inject liquidity into
the agency mortgage-backed security market by allowing banks to trade these securities in as collateral for loans.
On top of that, to shore up their finances and regain investors' trust, Fannie and Freddie have been instituting new
fees and stricter underwriting guidelines, making it costlier and harder to qualify for traditional mortgages.
In an investor conference Wednesday, Freddie officials sought to calm jitters by saying the agency has
"significantly" increased prices, introducing new fees based on risk levels.
Prepare to pay more for a mortgage
Wholesale Access has estimated that all these changes mean 30% to 40% of borrowers who could have qualified
for a conventional mortgage a year ago can no longer do so.
Fannie and Freddie are demanding higher credit scores and charging higher rates for those who don't have them.
Until recently, a borrower with a 620 score might pay the same as one with a 680 score, said Victoria Bingham,
chief executive with Pacific Rim Mortgage in Tigard, Ore.
But now that person might have to pay a half percentage point more. With today's rates, that translates into 6.75%
for a 30-year fixed-rate mortgage instead of 6.25%, or $74 more a month on a $225,000 loan, typical for her client
base.
Borrowers must also put more money down, especially if they don't have stellar credit. For instance, those with
down payments of less than 5% need a credit score of at least 680, said Steven Plaisance, executive vice president
of Arvest Mortgage Co. in Tulsa, Ok. Previously, he could make loans to people without big down payments if
they had other strong points, such as stable employment.
Experts said they don't think traditional mortgages will disappear. But if they are harder to get, it will take longer
for the housing market to recover as a glut of unsold houses could lead to even more declines in real estate values.
"Fewer buyers who can come into the market mean more homes on the market," LaMalfa said. "The absence of an
increase in demand will put further pressure on prices."
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