Mortgage Monday

Yes, they have done it again. Fannie and Freddie are charging you even more for your mortgage, even if your credit is pristine!  A few years ago, Fannie and Freddie came out with a system of pricing mortgages based on the borrowers’ FICO score and amount of equity they were borrowing.

Called the Loan Level Price Adjustment Matrix, borrowers were rated and interest rates were set based upon two numbers: the FICO score and the Loan to Value. When they came out with this loan level price adjustment matrix a few years ago, we all were for it.  It was created to deter both over borrowing and over lending to people with poor credit, using the FICO score as the main indicator. The lower the FICO score, the lower the Loan to value. Meaning, the worse your credit score, the less money the bank would lend you based on the value of your home. Since they first came out with this beautiful FICO score/Loan to Value charts, they have raised the bar several times. Again, the mortgage industry were all for it.

This time, have they gone too far?

Based on the last pricing matrix a credit score of over 740 was considered pristine and had no affects on your interest rate or borrowing power. With the new pricing matrix, a score of 740 will now create an impact when you loan to value goes over 75%. That is just silly!

Before, if your credit score was under 680, you could borrower more than 80% of the value, now you can’t go over 80%- even with private mortgage insurance (PMI). Again, killing the market.

And so on…….

I hate to bore you with many examples, simply look at this chart above and calculate what applies to your situation. The changes are noted in red.

The charts included in this post are only for purchases and no cash out refinances. These changes will effect all residential loans for 1-4 family homes, condos and coops. It will have a greater impact on 2-4 unit homes, even when they are owner occupied. Investor properties are even more difficult now to get mortgages for, especially 2-4 units and condos.  The buzz was that FHA will take on more loans, especially with loan to values over 80%, but they are tightening in the reins also.

What does this mean for real estate in 2011? With interest rates going higher, guidelines getting tighter and credit score have an impact on interest rates; well it is not looking so rosy. The middle market, which is the majority, will be impacted the greatest. High end homes typically go to borrowers with more money to put down and better credit scores (maybe), lower end homes just aren’t selling or can still get some sort of government financing. Once again, Middle American will get the cut. Have they gone too far with these pricing adjustments and how much of an impact will it have on a very fragile housing market? With the economy walking a tightrope is now the time for Fannie to make up for lost profits?