Fannie & Freddie Tighten Lending Standards

Jun 22nd, 2009 @ 3:30 PM by Alden Smith

According to the Wall Street Journal, Fannie Mae, in efforts to provide some stability in the mortgage market, have said that they will no longer guarantee mortgages on condominiums that are in buildings where fewer than 70% of the units have been sold.  Representatives Barney Frank, D., MA and Anthony Weiner, D., NY, have written a letter to the chief executives of Fannie and Freddie, warning them that the 70% sales threshold is detrimental to the market and could lead people interested in buying a condo away from new developments.

In all truthfulness, you must look at both sides of the coin.  Officials from Fannie Mae claim that these tougher rules aren’t causing as many problems as many claim.  For one thing the 70% rule doesn’t apply to loan applications that are submitted through underwriting programs used by most major lenders.  Fannie Mae claims that hundreds of applications have been approved since their new ruling took effect on March 1.  Housing developers can also apply for exemptions on loans that are manually underwritten.

Opponents to the ruling have reminded Fannie that the FHA requires 51% of the units to be sold before developers can secure approval for mortgages that are backed by FHA.  Allegedly the FHA has considered dropping the threshold, saying that tighter standards and regulations may delay any recovery efforts.  The FHA points out that its traditional role is to provide stability in a troubled housing market.

Fannie and Freddie also boosted fees for mortgages on condos.  A potential buyer must have a minimum 25% down payment to secure a loan.  If not, fees equal to 0.75% of their loan is charged.  Even those with good credit must pay the fees without the minimum 25% down payment.  The new rule took place in April.

People attempting to sell a condo are having a tough time.  Supposedly the new rules are making it tough for prospective buyers to secure financing.

In my opinion, Fannie and Freddie are doing the right thing.  We must remember that Fannie and Freddie are still under the watchful eyes of the government.  I have no idea what the break-even point would be for a new development of condominiums, but I think it would be safe to say that the 70 %  rule is a good bet.  It’s no secret that instability in the housing market has led to a lot of difficulties in this country.  I think it’s time for creative financing to take a backseat to market stability.  Leveling the playing field will certainly help to see that happen.