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Fannie Mae raised the bar for mortgage applicants this past weekend. Getting approved for a home loan just got harder.

In its official announcement, Fannie Mae says the updates minimize long-term lending risks. If that’s the case, this won’t be the last guideline change Fannie Mae makes — especially with loans defaulting at an above-normal clip.

The immediate changes are major. The first pertains to credit scores.    

Effective December 13, 2009, the bulk of Fannie Mae’s loans require a 620 credit score minimum. There are very few exceptions.

A second relates to loans with private mortgage insurance.

Homeowners whose loan-to-value exceeds 80 percent now have a choice:

1. Pay higher mortgage insurance premiums month-after-month
2. Pay a one-time fee paid at closing to compensate for higher risk

Both options result in higher consumer loan costs.

A third change concerns maximum debt-to-income ratio. Fannie Mae will no longer approve loans with debt ratios exceeding 45 percent except with very strong assets and very high credit scores.

In no case whatsoever may debt-to-income exceed 50 percent.

There are other changes, too, including the elimination of seldom-used mortgage products and additional risk-based fees for “expanded level” mortgage approvals. These updates affect just a small part of the population.

So, home prices are rebounding, mortgage rates are low, and — for 5 more months at least — there’s a federal tax credit for qualified buyers. You don’t have to buy a home now, but with mortgage guidelines sure to tighten in 2010, now may be a better time than later.

The best “deal” won’t matter if you can’t get qualified on your mortgage.

Copyright © 2009 JLM Industries. All Rights Reserved

The Federal Open Market Committee meets today for the last time in 2009. It’s a 2-day meeting and the Fed is expected to leave the Fed Funds Rate near 0.000 percent.

But that doesn’t mean mortgage rates won’t change.                                  

See, a major misconception among the public is that the Federal Reserve sets mortgage rates. That’s false. Mortgage rates are based on the price of mortgage-backed bonds.

As an example, since 2000, the Fed Funds Rate and the 30-year fixed rate mortgage have been within 1 percent of each other at times, and as far apart as 5 percent at others.

If there was a direct relationship between the two, such a spread would be impossible.

The Federal Reserve doesn’t set mortgage rates. Wall Street does. However, whenever the Fed adjourns from its meetings, mortgage rates are susceptible to change.

For home buyers and rate shoppers, this week’s Fed meeting takes on added significance.

Over the last half-year, the Fed has used its post-meeting press releases to acknowledge an improving economy in which growth is tempered by job loss and tepid spending. In November, though, net job gains nearly went positive and Retail Sales data proved strong.

If the Fed gets more positive in its message tomorrow, mortgage rates will suffer. This is because Wall Street will use the Fed’s position on the economy as a reason to buy stocks. Some of the cash to fuel those buys will come from the mortgage bond market.

As extra bond supply hits Wall Street, mortgage rates go up.

Similarly, if the Fed’s message goes negative on the economy, investors are expected to sell their stock positions in favor of buying bonds. This makes rates go down.

So, the Federal Reserve doesn’t make mortgage rates, but it does exert an influence on them. In other words, rate shoppers would be wise to watch for the FOMC’s 2:15 PM adjournment. Even though the Fed Funds Rate is expected to remain unchanged, mortgage rates certainly are not.

Copyright © 2009 JLM Industries. All Rights Reserved

Since peaking in July 2009, national foreclosure activity has dropped through 4 consecutive months.

On a month-to-month basis, November’s foreclosure activity fell another 8 percent.

However, national foreclosure activity continues to be dominated by a minority of states.

As reported by RealtyTrac.com, more than half of November’s foreclosure-related activity sourced from just 4 states:

1. California
2. Florida
3. Illinois
4. Michigan

These are the same 4 states that topped October’s foreclosure activity despite three of them posting month-to-month declines last month.

The remaining Top 10 states in terms of total foreclosure activity include Arizona, Texas, Ohio, Georgia, Nevada and New Jersey.

If you’ve been actively looking at REO lately, you’ve likely noticed that true bargains are harder to find. This is because buyers of all types — first-timers, move-ups, and investors — are purchasing bank-owned homes aggressively and getting better at identifying the “best ones”.

But just because supplies are dwindling doesn’t mean you should just jump in. Buying foreclosures isn’t for everyone for two very strong reasons:

1. The closing process can be unpredictable

Therefore, if you’re thinking of buying a foreclosed home, be sure to talk with your real estate agent about potential problems before going under contract. Better too soon than too late.

There are still good deals in the foreclosure market, but based on November’s data, they may not last through the winter. “Distressed home” sales now account for 30 percent of home resale activity.

Copyright © 2009 JLM Industries. All Rights Reserved

If you wonder what mortgage rates and home affordability will look like next year, today’s Retail Sales data may hold your answer.
Versus October, November’s ex-auto sales were up by more than 1 percent. Analysts expected the increase, but not an increase of this magnitude.
“Ex-auto” means that motor vehicles and parts are excluded from the data.
Home values are increasing in many parts of the country and household net worths are rising, too. Therefore, we can infer from the Retail Sales report that U.S. consumers are starting to feel better about their individual finances, and about the economy overall.
To homebuyers and rate shoppers, strong Retail Sales data may foreshadow higher mortgages ahead. This is because sales data is a by-product of consumer spending and consumer spending accounts for more than two-thirds of the economy.
As spending increases, the economy tends to expand, drawing investment dollars into stock markets and away from bond markets — including mortgage-backed bonds, the basis for conforming mortgage rates.
Less bond demand leads to higher rates and, therefore, lower levels of home affordability.
Despite the Holiday Season momentum, however, 2009 will likely mark just the second time that Retail Sales data fell year-over-year since the government started tracking it 40 years ago. The other year was 2008.
But, if November’s Retail Sales is a reliable indicator of consumer sentiment overall, we should expect 2010 to rebound strongly. And when it does, mortgage rates should suffer.
The housing market is recovering, mortgage rates are still near all-time lows, and the government is offering an $8,000 tax credit to qualified buyers through April 30, 2010. If you plan to buy a home next spring, you may want to consider moving up your timeframe. Waiting may be costly.

Copyright © 2009 JLM Industries. All Rights Reserved