FHA and Fannie Mae Adapt To Distressed Mortgage Market
Deed-for-Lease Program - Fannie Mae
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae together with the Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac owns or guarantees almost $5.5 trillion mortgages in the United States.
With the current economic climate bringing a marked increase in property owners facing foreclosure Fannie Mae has introduced a new win-win solution whereby many of these homeowners will be able to stay on in their houses as tenants and at the same time Fannie Mae will be able to curb its losses and generate some income from the rentals.
The new Deed for Lease initiative was announced early in November and will assist homeowners who may be facing foreclosure and do not qualify for loan modifications. Borrowers who qualify will be able to transfer the deed for a home over to the lender and lease back the property for a period of up to 12 months, giving the homeowners time to plan for future accommodation.
This offer is only open to borrowers whose mortgage loans are owned or guaranteed by Fannie Mae. Not all of these properties would qualify for the Deed and Lease offer as there are certain conditions that must be met. The property must be used as a primary residence by the homeowner and must be free from any regulation that would act as an impediment to a deed-and-lease swap. Property that is subject to zoning or is in violation of local laws or rules would not qualify. The property must be in a reasonable state of repair as very high repair costs would also disqualify the property.
The rental income must be sufficient to cover the costs of managing and maintaining the property and the borrowers-turned-tenants must be employed and have a verifiable income to qualify for the program. The income of the tenant must be sufficient so as to ensure that the rental represents no more than 31% of the total gross monthly income. The onus will be on the borrower-turned-tenant to maintain the property and ensure that no illegal activities take place at the premises.
Fannie is hoping that by launching this initiative that private companies will follow suit and establish similar deed-for-lease programs.
Fannie Mae Deed For Lease Program
FHA Loans To Cost More
The Federal Housing Association (known as FHA), a government housing agency that insures home loans against default, stepped up to the table after the mortgage market was destroyed by the real estate crash. Three year ago the FHA only backed 3% of new home-purchase mortgages but by keeping the credit requirements for FHA-backed loans fairly liberal they have managed to gain 30% of the new home-loan market. One of the main reasons for the growth of FHA’s market share is the low down-payment requirements of only 3.5% compared to some other home loans without FHA backing that can have down-payment requirements of anything between 10% and 20%.
A recent actuarial study has however forced the FHA to rethink its lending strategy as the study concluded that the agency’s reserves have dropped to below its congressionally mandated level of 2%. The FHA’s weakening balance sheet is compelling them to increase their down-payment requirements. It is as yet still uncertain as to the extent of the increase and the final details will only be released in January but it is expected that the increase will be marginal.
All FHA-backed loans require an upfront and annual fees that are paid into an insurance pool. In the event of default FHA utilizes the cash in the insurance pool to reimburse lenders. Currently the insurance premium is 1.75% which is below the statutory cap but the annual fee has reached the capped amount. FHA have requested Congress permission to increase the annual fees as a means of strengthening the fund.
The FHA has until now accepted borrowers in any credit score range of 500 and above. They intend raising their minimum credit score requirements. This should however have very little impact as the lenders currently use their own credit score requirements which is very rarely below 650.
Potential home-owners that will be impacted the most by these new guidelines are some marginal buyers that may have met the criteria in the past. These changes may slow down the house sales slightly but should also bring a decrease in the foreclosure and delinquency rates and help ease the pressure on the FHA’s financial position
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