Mortgage Loans: Fannie Mae Squeezes Mortgage Standards

Home Buyers and Refinance: US Home buyers and refinance applicants will soon find mortgages harder to set

Fannie Mae gets tough with Home Loan Borrowers and Mortgage Lenders 

Fannie Mae is the largest source of money for the U.S mortgage industry and has warned mortgage lenders it will be raising some of its qualification standards for people buying homes, whether first homes or second home buyers, and also for those seeking mortgage refinance.

The changes to Fannie Mae Mortgage standards include lowering Loan to Value Ratios 

In the past mortgage borrowers could buy homes with no money down in some cases, but typically a 3% deposit [down payment] would get home buyers over the line.
Starting from October 2012, the changes to lowering loan to value ratios for some adjustable-rate mortgages to 90 percent, down from a maximum of 97 percent.
Mortgage applicants also require a better credit history than previously, with an increased credit scores requirements for certain loans.

Low doc home loans for the self employed tightened 

Fannie Mae also will start demanding more tax returns from self-employed borrowers. Many are expecting that many borrowers in self employment will suddenly find many mortgage avenues closed to them, and this may make some homes harder to sell.

Tougher Guidelines for Mortgage lenders 

Fannie Mae (FNMA) and its smaller Government Sponsored Enterprise mortgage intermediary Freddie Mac, guarantees mortgage-backed securities financing of two-thirds of all new loans, so more misery for the housing market is likely to continue for some time
Fannie Mae told mortgage lenders that the adjustments were part of regular reviews of data and loan performance.

Stricter Reporting standards

Both Fannie Mae and Freddie Mac will need to provide annual reports on actions they are taking “to reduce taxpayer exposure to mortgage credit risk.” The requirement is part of changes to the companies’ bailouts agreements the Treasury Department last week.

Credit Scores and Credit history

Fannie Mae’s tightened standards include an increase of minimum credit scores for adjustable-rate mortgages needing to be at least 640, up from a previous minimum of 620, [on a scale ranging from 300 to 850, with 850 being clear credit], and removing flexibility to move on this with mitigating circumstances. 

The concept of benchmarking will also be eliminated. 

Instead, 36 percent will be the “stated maximum,” [This ratio can be as high as 45 percent if the borrowers meet credit score or cash reserve thresholds.] This “provides more transparent requirements with regard to how compensating factors must be applied,” 

Borrowers without credit histories will only be able to apply for single family homes they intend to live in [owner occupied].

Appraisals to be more thorough

Fannie Mae will now require a full inspection to appraise the value of the property. [No more drive by, or kerb-side appraisals will be accepted.
Sworn Appraisals will mean valuers will be liable for overstating values and this has also been a problem in Australia in the past. 

Duplex dwellings are the exception

An exception to loan tightening is duplex dwelling unit blocks upping LVR to 85% Fannie Mae is loosening some standards with the loan-to-value ratio allowed for some fixed-rate loans on two-unit properties will increase to 85 percent, from 80 percent. Down payment requirements [deposits] also will fall for certain co-op loans. It is obvious where people buy a duplex home and rent one unit out, that these people will have fewer problems in repaying the mortgage.

Australia is watching these mortgage tightening

These developments are being watched in Australia, with several similar recommendations being made by the RBA and other Peak finance groups concerning Low doc loans and Loan to value ratios and even interest only home loans.

Mr Mortgage

100 Percent Interest Only Home loans: Did they increase the size of your mortgage?

Easy mortgage money including interest only mortgage loans, short term mortgage lending and home loans for 100 per cent of the property's valuation might soon be curtailed 

Boom and bust in house prices: is easy finance the driver? 

Nobody wins in boom and bust property markets, with the exception of savvy property investors, those getting out of real estate during a boom, and maybe real estate agents and mortgage brokers.
When you have winners, there must be losers in the zero sum game of the giant Ponzi Scheme that we have seen operate across the Globe over the past 12 years.
So what's the answer, beside living in a cave or under a bridge?

Home loans that require a saved deposit are best for the majority of home buyers and lenders, and the housing market in general. Three peak economic institutions found that requiring mortgage borrowers to save and provide a decent deposit would moderate future housing booms, and reduce any down side or housing bust. 

The Reserve Bank, the International Monetary Fund and the Bank of International Settlements claim That:

1. Setting maximum loan-to-valuation ratios could help reduce the damage housing cycles cause to the economy. 
2. And that ensuring home buyers pay down their home loan has many benefits including:
1. The Reserve Bank believes that having home buyers amortise their home loans, by having them paying down the loans delivered two benefits. 
1. It lowered the purchase price that a borrower could borrow on, and meant that homeowners gained equity in the property. 
2. And because this would effectively lower the closing price of the home, then it would moderate house prices more in line with earnings. 

Going from renting homes to renting money 

An interest only loan has effectively meant that people have gone from renting their home to renting the money to buy a home. The only thing that changed is the bank is now the landlord?

Interest only home loans are seductive

 Interest only home loans means you never pay off the principal. How could this be of any benefit? Well in lowers the mortgage payments. And that means less commitments [all tax deductible] whilst the property gains capital value as house prices rise. But is that model sustainable going forward? I don' think so.
And home buyers got sold on interest only mortgage payments because of these lower repayments.
And made a more expensive home seem affordable. And made selling a home for more money easy. Soon home buyers were forced to take these loans as they were the only path to home ownership. Again, this was sale-able as long as prices kept increasing.
The problem with that is that home buyers were going from renting homes to renting money.

With the glory days of high returns behind us, people should be buying a home for future financial security. So buying a home with little equity and no amortisation of the principal could mean that home loans could quickly go under water. When this happens then people may just decide to quit their homes. This happened on a large scale in the US and after 4 years, property prices seem to be returning to a path of moderate property gains. 

Property Investors may get caught in low performing investments

Restricting credit by increasing deposit requirements, and snuffing interest only loans may cause a drop in demand, and that may be enough to lower price increases in housing.
If that were to happen, it could mean an exodus in property investors in housing, and that would see both a price crash and an increase in rental demand. But this would only be temporary, and the outlook would be more affordable housing and more Australian buying their own homes.

Bank home loan policy can only be controlled indirectly, under current legislation

The fact is that Australia's banks are free to lend as they see fit.
However, the Australian Prudential Regulation Authority [APRA] sets policy on banks setting aside capital to cover loans, presently for more than 80 per cent of a property's valuation.
SO how can they offer 95% or 100% loans? Easy.
The gap is covered by mortgage insurers. This means that Australian banks are well protected from any downside in property bubbles, and can currently bypass this safe guard.
Can you imagine how less we would be paying for homes if home buyers had to come up with a 20% deposit?
Banks are also free to make interest-only loans. 
In fact this has been a big selling point with many home loan scenarios, including 5 year and ten year interest only loans that convert to Principal and interest repayments later to ensure the loan is paid down.

Its interesting that a big player in this type of loan has recently seen big drops in its share value. If we move to this new model I see moderate house prices for the future and that would make it less attractive for investors. 

Will the Government move to offer first time home buyers on low incomes tax deductions?

So maybe we should see Governments moving to tax deductions for first time home buyers on low incomes. 
This would improve housing demand for smaller, low cost housing, and that is where any housing shortage will be most felt. Did "easy to get home loans", "interest only home loans" and "100% mortgage financing" increase the demand and therefore the prices of your current home, and the land it was built on?
The answer would have to be yes.
So any credit restrictions will have a reverse effect. Fortunately we have been restricting home loan credit in Australia before the the GFC compared to the US, and since the GFC we have restricted lending further. So any further restrictions will moderate capital gains in residential real estate further, and that could see reductions in people using property to build wealth.
So maybe the Government has to fill the gap by empowering low income earners to buy smaller homes and allow them to build modest wealth and financial security by giving them tax breaks on their home loan interest.

Commbank says no to mortgage interest rate cut

The Commonwealth Bank's chief executive Ian Narev has ruled out a rate cut independent of the Reserve Bank in the short-term.

The major banks have increased mortgage rates relative to the Reserve Bank's cash rate since the onset of the financial crisis, by lifting rates when the Reserve has kept them on hold, increasing them by more than the RBA's cash rate rises, or not passing on the same percentage point reduction as the RBA when official rates have fallen.

Westpac's chief executive Gail Kelly and Mr Narev had both intimated previously that their banks will eventually reduce their mortgage rates relative to the cash rate as funding costs ease.

However, speaking to AM, Mr Narev says funding costs remain high, meaning that a potential home loan rate reduction relative to the Reserve Bank's cash rate will have to wait.

"You've got to bear in mind that what puts pressure on our wholesale funding is the cost of new funding relative to the cost of the funding it replaced, which isn't usually funding from a month ago, it's funding from two or three years ago, and that continues to go up," he said.

"The other factor we've got here is that deposit competition is increasing and, as I said before, depositors do well, but that does continue to put pressure on our deposit pricing so, as we sit today, unfortunately we're not at the end of a cycle where funding costs are going up."

Ian Narev says that situation is unlikely to change in the short-term while volatility and uncertainty about Europe's economic future reigns.

"We think there must be a solution, it involves greater integration, but we can't see how that solution's going to be workable politically and I continue to hold that view today. And I don't think that uncertainty's a good thing for the global economy or indeed the economy here in Australia," he observed.

"So, we don't foresee a big disaster in Europe, although that is a possibility, but at the same time we can't really see yet what the catalyst is going to be for a significant improvement."

However, despite the prospect of mortgage rates remaining high relative to the cash rate and the bank's record $7.1 billion profit, CBA's chief has brushed aside calls for a another banking enquiry.

"We do think it's a very competitive banking system, so I don't think you need an enquiry to tell as that. And indeed we've had various versions of enquiries trying to get at that and, I think what I've said before on the impact on margin shows that it is competitive," he added.
"But there are legitimate questions about Australia's long-term funding that need public debate and, if the way to do that is through an enquiry, then we would be happy to participate in that."

Source: Mr Mortgage 

Credit card scam: Half a million Credit Card numbers breached in Australian Point-of-Sale Hack

Australian Police are investigating a breach of half a million credit card numbers by the same gang that struck the Subway restaurant chain in the United States.

The credit card hacking intrusion occurred at an unidentified merchant in Australia and is being blamed on Eastern European hackers who installed keystroke-logging software on point-of-sale terminals (POS) and siphoned card data from the terminals remotely, according to SC Magazine.

The company’s network used default passwords and stored unsecured transactional data. The gang allegedly used an unsecured Microsoft Remote Desktop Protocol (RDP) connection to transmit the data.

"The network was setup by some local suppliers who didn’t understand IT security,” Det. Sup. Marden told the magazine. “It was a disaster waiting to happen.”

The hackers are believed to be members of the same Romanian group that was responsible for hacking 150 Subway sandwich shops and other unnamed retailers in the U.S.

Last December, four Romanian nationals – Adrian-Tiberiu Oprea, 27; Iulian Dolan, 27; Cezar Iulian Butu, 26; and Florin Radu, 23 — were charged in the District of New Hampshire with four counts related to those hacks, including conspiracy to commit computer fraud, wire fraud and access device fraud. The indictment also referred to two unindicted co-conspirators who used the online nicknames “tonymontanamiami” and “marcos_grande69.”

Few details have been released about the credit card hack in Australia, but in the Subway case, the hackers compromised the credit-card data of more than 80,000 customers and used the data to make millions of dollars of unauthorized purchases, according to authorities.

From 2008 until May 2011, they allegedly breached more than 200 POS systems in order to install a keystroke logger and other sniffing software that would steal customer credit, debit and gift-card numbers. They also placed backdoors on the systems to provide ongoing access.

POS systems generally consist of a card scanner at a checkout register where customers scan their cards and type in a PIN or provide a signature, as well as a computer system for transferring the data to a card processor for verification and approval.

The indictment didn’t identify the POS system used by Subway, nor does the news from Australia indicate the brand of terminal attacked in that breach, but Subway announced in January 2009 that it was deploying the Torex Quick Service POS in all of its 30,000 restaurants.

The Subway case shared similarities to what occurred to seven U.S. restaurants that sued the maker of a POS in 2009 for failing to secure the product from a Romanian hacker who breached their systems.