Fannie Mae said because it can't effectively gauge the risks that loans with prepayment penalties bring to homeowners it has decided to limit the acceptance of those mortgages to those that are delivered under negotiated commitments.
Mortgage loans with prepayment penalties had grown in popularity over the last few years as investors sought refuge against the rapid runoff associated with the fast refinancing pace set by 25-year low interest rates. Although many states prohibit the use of such penalties, some, such as California, allowed the practice. And many lenders, such as San Francisco-based Bank of America, made extensive use of such instruments.
Fannie al lows sellers to use a rider to add a prepayment provision to loans it purchased. But because mortgages closed this way are eligible for delivery under a standard-, negotiated cash- or mortgage-backed security-basis, some inconsistencies have resulted in treatment of prepayment penalties that have "hampered our ability to precisely identify the number and types of mortgages that are subject to these penalties," Fannie said in May 19 announcement, No. 94-07. It also said not having that specific information prevented it from determining "whether a specific prepayment penalty unduly penalizes borrowers."
Beginning with loans closed on or after Sept. 1, 1994, Fannie will no longer purchase conventional first or second mortgages closed on documents that have been amended to add a prepayment provision--unless the amendment or additional rider provides that the prepayment penalty will not be enforced if sold to Fannie Mae.
Fannie also said it will not enforce any such provision on any loan it holds in its portfolio, regardless of the date on which the mortgage was closed.
Fannie also changed its underwriting standards for targeted affordable multifamily housing. Under Fannie's four-tier pricing structure, mortgages targeted to affordable housing will now receive better pricing and are allowed lower debt service coverage levels.
The changes, outlined in Fannie's new Delegated Underwriting and Servicing Guide, also liberalize guidelines for refinancing "blanket" loans underlying cooperative buildings. Blanket mortgage loans finance the cooperative itself, Fannie said, rather than the individual units in the building.
The changes reduce the requirements for the percentage of owner-occupied units, allow a modest amount of negative cash flow, and allow higher loan-to-value ratios for the blanket loans.
In addition, sublet units can now be included in calculating the percentage of owner-occupied units.
A Delegated Underwriter Servicers lender, however, must have advance authorization to originate, underwrite and sell co-op blanket loans to Fannie.
