Are Fannie and Freddie accepting riskier loans?

By Jeff Lazerson

1/18/18

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.

Rate news summary

From Freddie Mac’s weekly survey: For the first time in six months, the 30-year fixed broke above the 4 percent line, this week averaging 4.04 percent. That’s 5 basis points higher than last week’s 3.99 percent. The 15-year fixed averaged 3.49 percent, also 5 basis points higher than last week’s 3.44 percent.

The Mortgage Bankers Association reported a 4.1 percent increase in loan application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $453,100 loan, last year’s rate of 4.09 percent and payment of $2,187 was just $13 more than this week’s payment of $2,174.

What I see: Locally, well-qualified borrowers can get the following fixed rate mortgages at one point cost: A 15-year at 3.125 percent, a 30-year at 3.75 percent, a 15-year agency high-balance ($453,101 to $679,650) at 3.375 percent, a 30-year agency high-balance at 4.0 percent, a 15-year jumbo (over $679,650) at 4.0 percent and a 30-year jumbo at 4.25 percent.

What I think:  Subtle as they seem now, three mortgage changes could be the genesis of the next nasty real estate downturn.

Mortgage insurance giant MGIC announced that March 1, it will no longer insure borrowers when the debt-to-income ratio is higher than 45 percent and the representative FICO score is less than 700.

What’s this all about?

As loan volume slowed in early 2017, Fannie Mae and Freddie Mac pushed down on the gas pedal, saying yes to a wider pool of potentially risky borrowers.

The automated underwriting responses from Fannie and Freddie were expanded earlier in 2017 to allow debt-to-income ratios, or DTI’s, greater than 45 with traditional offsetting reserves, said MGIC spokesman Mike Zimmerman.

“Our experience is borrowers with lower credit scores and higher DTI represent layered risks that tend to result in a claim, or foreclosure, materially more frequently than a borrower with a 36 or 38 DTI,” Zimmerman said.

And, remember FICO scores were somewhat diluted in July 2017 when the three credit bureaus decided to stop reporting federal tax liens and civil judgments that impact credit scores.

The big deal is the potential cascading effect on your neighborhood values if foreclosures start hitting when the economy slows.

Yes, The O.C. has potential exposure. According to CoreLogic, over the last five years, 16.7 percent of Orange County conventional purchases and 4.8 percent of refinance loans saw loan-to-values over 80 percent (likely insured with mortgage insurance).

Consider an Orange County family of four with an annual income of $125,000 or $10,416 in gross monthly wages. The family purchases a tiny Orange County home for $579,000 with 5 percent down and a credit score under 700. I compute a total house payment of about $4,100.

Under the new tax rules, federal and state taxes withheld from the monthly family paychecks would be approximately $1,935, according to Warren Hennagin, CPA and partner at Marcum LLP.

Take the house payment of $4,100 and the $1,935 payroll taxes. Disposable income left is just $4,381 a month for that family of four. Groceries, utilities, auto expenses, medical, clothes, household maintenance and discretionary spending all need to fit into that remainder. Hurts!

So, is MGIC the trailblazer or an alarmist?  Only Radian and Essent responded. Both mortgage insurers are standing pat, insuring these loans that MGIC soon will not.

Just a few years ago, all private mortgage insurers were required to have a new level of capital reserves called private mortgage insurer eligibility requirements, or PMIERS, if they wanted Fan and Fred’s business.

The mortgage insurers typically take the first financial hit on losses.

No comment from Fannie.

“Freddie Mac doesn’t opine or comment on another company’s view on risk,” said Chad Wandler, Freddie Mac spokesman.

Next week you’ll learn about real estate downturn dangers in the sub-prime mortgage world and at the Consumer Financial Protection Bureau.

If you have questions or comments, please contact Jeff Lazerson by clicking here.