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Fannie Mae sets new loan boundaries

Amy Scott Apr 18, 2008

Fannie Mae sets new loan boundaries

Amy Scott Apr 18, 2008


TESS VIGELAND: Tired of hearing about the housing mess?
Here’s a bright spot. If you were priced out of the boom market, it’s possible you might find a home within reach these days. That’s one reason mortgage applications are up. A Reuters/Zogby poll out this week said a majority of Americans think now is a good time to buy a home. But so much for that bright spot. Many who take the plunge are finding themselves up against a new roadblock.
Marketplace’s Amy Scott reports.

AMY SCOTT: On a recent evening in Chicago, Rachel Unruh and Doug Schenkelburg went through the bedtime ritual with their 5-year-old, Sam.

By now they thought they’d be eating dessert, not in this rented apartment but in their own home. A few months ago they found the perfect place in a suburb of Chicago. Four bedrooms. A deck for grilling.

They were ideal buyers. Together they make more than $125,000 a year. Their credit score is an enviable 800 — 850 is the highest. They could afford a 5 percent downpayment. But Schenkelberg says just when it came time to finalize the mortgage. . .

DOUG SCHENKELBERG: We got a call from our mortgage broker that said that he had some bad news.

The bad news was that Fannie Mae, the company underwriting their loan, had determined that the house was in a declining market. Fannie Mae expected home prices in the neighborhood to keep falling.

SCHENKELBERG: And because it was a declining market, we had to put an additional five percent down in order to purchase the home.

Unruh say that extra five percent added up to another $17,000.

RACHEL UNRUH: We sort of talked and thought about how we could pull it together. The issue was that if we went ahead and put down 10 percent it kind of eliminated the cushion that we feel comfortable having.

Unruh and Schenkelberg had encountered the downside of falling prices. When prices drop, borrowers with little equity in their home run the risk of owing more on the mortgage than their house is worth.

Paul Jackson publishes the mortgage industry news site Housingwire.com. He says to protect themselves, the government sponsored mortgage finance companies Fannie Mae and Freddie Mac are requiring a larger contribution from borrowers. Private lenders are doing the same.

Jackson says when buyers have more skin in the game…in the form of bigger down payments…they’re less likely to walk away.

PAUL JACKSON: What lenders are doing now is saying, “Look, we’re getting back 40 cents on the dollar on these loans. We need to make sure that we going forward can protect ourselves and make sure we’re not put in this situation again. They’re, in my opinion, taking prudent risk management approach to their business.

Fannie Mae’s policy does give lenders some leeway. They don’t have to charge the extra 5 percent if they believe a home won’t decline in value…and can back it up. But fair housing advocates worry these new policies could have unintended consequences. Fannie Mae is classifying declining markets by ZIP code.

Allen Fishbein is director of housing and credit policy at the Consumer Federation of America. Fishbein says by discouraging investment in these areas, the policies could cause even more price declines.

ALLEN FISHBEIN: As a practical matter, targeting particular neighborhoods or groups of neighborhoods could have the effect of almost redlining those communities, sending a signal that those neighborhoods were not viable for private mortgage capital.

Redlining refers to a practice common in the 1960s and 70s. Lenders would essentially draw a red line on a map around neighborhoods where they wouldn’t invest. These were often older urban neighborhoods, predominantly African American or Latino. Places like Oak Park outside Chicago, where Rachel Unruh and Doug Schenkelburg have been trying to buy.

Unruh says the deal they’ve been trying to make is with a homeowner who could face foreclosure if she doesn’t sell.

UNRUH: And, you know, good, stable borrowers like us and other people out there could come in and stabilize that housing market. And it just seems like the system’s not working in a way that will let that happen.

Fannie Mae has been meeting with community groups about their concerns. A Fannie Mae spokesman told Marketplace the company is considering making changes to its policy to address those concerns.

It’s tooth-brushing time at the Unruh-Schenkelberg household. Despite Fannie Mae’s policy, they may soon get their wish for a new home. They eventually found a community lender who didn’t require that extra 5 percent down. Now they’re negotiating with the seller’s bank.

I’m Amy Scott for Marketplace.

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