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September 30th, 2009

Fannie Increases Credit Score Requirement

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The current state of both the housing market as well as their own finances have caused mortgage giant Fannie Mae to tighten their lending criteria. Fannie Mae will increase their requirement for a minimum credit score of 620, up from 580 beginning November 1. The change covers virtually all loans in today’s marketplace, including FHA and VA loans.

Certain loans will remain exempt from the credit score increase such as manually underwritten loans with nontraditional credit and originations under Refi Plus or DU Refi Plus programs.

Loathing in Las Vegas

Our friend Esko Kiuru, a mortgage consultant in Las Vegas, says while Fannie’s restrictions will hamper the emergence of a recovery in the areas surrounding his city, he does acknowledge that, given current market conditions, it’s certainly “understandable.”

While Fannie’s more prudent lending requirements do in fact mean that credit will be unavailable for some audiences. This should help to further improve the quality of loans being written, lessening the likelihood of future losses.

Redefaults

The markets continue to struggle with yesterday’s bad loans, and the latest news suggests that efforts to repair those problems just aren’t working. Alan Zibel of the Associated Press wrote an article today which explained that default rates of modified loans are extraordinarily high. Even borrowers who have had their monthly payments significantly reduced are still failing:

More than 50 percent of homeowners with loans modified in the first half of last year had missed at least two months of payments a year later, the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision said Wednesday.

About one in three borrowers whose monthly payments were reduced by 20 percent or more had fallen behind again within a year. That compares with more than 60 percent for borrowers whose loan payments were left unchanged or increased.

The Fed Has Left the Building

And for those of you who think the credit markets are poised to thaw anytime soon, perhaps it’s time to rethink that notion:

Another day, and another Federal Reserve official [Fed Vice Chairman Don Kohn] warning us that the central bank will someday have to take away the enormous wad of cheap money it has provided to the financial system and the economy.

Translation: When the Fed starts sensing that inflation pressures are building because people and businesses are spending again, it will be time to make easy money much less easy.

So by now we all know that credit conditions have and may continue to tighten, and “easy money” is nearly impossible to come by. If you can envision the housing recovery as a puzzle, than your image would be of an incomplete one — you may be developing a sense of what the final product may look like — but are still missing too many pieces (home prices, jobs, mortgage insurance, private capital) for you to know how it will turn out.

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4 Responses to “Fannie Increases Credit Score Requirement”

  1. Concerned Citizen Says: September 30th, 2009 at 9:53 pm

    The theory that the loan modification would work for people who are in financial hardship leaves far too much to be desired. There is a psychological message being sent to the public that will hinder the spending mindset of people for years to come. Those that purchased homes far above their debt capacity or enlarged their mortgages by taking out equity to pay down other debt or buy more material goods are also being grouped in with those that fall in a hardship category.

    I think it’s sending the wrong message to the citizens that if you spend over your head, it’s ok, you can use the economy as an excuse and you’ll receive a get out of debt free card or we’ll lessen the burden by making your overspent home more affordable.

    In theory the modification should work for a very small select group of people. But the criteria & the process is far too vague and far too inferior. I think the banks need to spend more time fine tuning this before it will work for the people who honestly and truly need it.

    As it stands now, the loan mod is only a temporary bandaid that will delay the inveitable for a poorly budgeted family that spends above their means. The market will have to correct itself and the loan modification is only making this process longer and more painful. Especially for taxpayers that also have underwater mortgages and aren’t leaving their homes and aren’t asking for help.

  2. SuttonMarketing (SuttonMarketing) Says: October 1st, 2009 at 1:01 am

    SuttonMarketingTips: Fannie Increases Credit Score Requirement | HSH Financial News Blog http://tinyurl.com/ycvt5qo

  3. Tim Manni Says: October 1st, 2009 at 9:44 am

    Concerned Citizen,

    Great comment, you’ve touched on some crucial points and criticisms. There certainly has been an entire audience that would agree with your comment that “it’s sending the wrong message to the citizens that if you spend over your head, it’s ok…” That has been a point of criticism of these relief programs since they were first announced.

    I agree that mods will and have worked for a select group. The statistics are clearing showing that even those who are helped, for one reason or the other, end up failing anyway.

    My opinion on the bank’s involvement with these mods is a conflicted one. Banks are being pressed by Washington to save capital, all the while being pressured to do other things like modify loans. The bank’s participation in the mod program is completely voluntary. That being said, this blog has heard from many different homeowners who have just had a horrendous experience in dealing w/ their given bank. Whether paper work gets lost or the bank foreclosed despite the borrower making all of their trial payments…it’s a mess.

    The market will have to correct itself, but as I said, there are a lot more pieces that have to fit in before housing can recover. There’s not much we can do about these programs beside hope they start working better than they have.

    Again, great comment, please visit us again soon!

    Thanks,
    Tim

  4. Foreclosure Rate Rises 17 Percent | Stop4closure.com Says: October 4th, 2009 at 3:08 pm

    [...] Fannie Increases Credit Score Requirement (hsh.com) [...]

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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