Fannie Raises Bar

In the latest tightening of mortgage standards, Fannie Mae is raising credit score requirements.

The government-sponsored enterprise told lenders this week that it will require a score of at least 620 for most loan types — including those insured by government agencies such as the Federal Housing Administration and Department of Veterans Affairs.

Currently, the minimum score for most products is 580, and there is no minimum for government loans. The new minimum will take effect for manually underwritten loans on Nov. 1, and for loans underwritten using Desktop Underwriter when Fannie updates the software on Dec. 12.

"Our experience with recently delivered loans with credit scores below 620 is that they reached a level of serious delinquency at a rate approximately nine times higher than other acquisitions during the same period," Brian Faith, a spokesman for Fannie, wrote in an e-mail to American Banker Wednesday.

Loans that are underwritten using nontraditional credit data like rent or utility payments will remain exempt from minimum score requirements, Fannie said. So will Refi Plus, a product offered under the Obama administration's Home Affordable Refinance Program to borrowers who owe more than their homes are worth on an existing loan owned or guaranteed by Fannie.

Eye on Refis

Refinancing applications jumped last week as the average 30-year fixed rate dipped below 5% for the first time since mid-May, the Mortgage Bankers Association said Wednesday.

The trade group's index of refi requests increased 17% over the previous week. Its index for applications for home-purchase loans climbed 5.6%, driven by demand for government loans, the MBA said.

The index of government purchase loan application volume reached the highest level ever recorded since the survey began in March 1990. Government loans' share of all purchase-loan applications was 45.7% last week, the highest since November 1990, the MBA said.

Mortgage Maxx LLC said Tuesday that its index of refi and purchase applications in eight bellwether states climbed 2.4% last week from the previous week. The Ossining, N.Y., data firm's component index for California applications increased 5.2%.

Mark Fleming, the chief economist at First American CoreLogic, a unit of First American Corp. of Santa Ana, Calif., released a study last week that found refis resulted in $2.3 billion in mortgage payment savings in the first half of the year.

The Federal Reserve Board's lowering of mortgage rates through purchases of mortgage-backed securities, and other federal programs such as Harp, have allowed 2 million consumers to reduce payments by an average of $120 a month, Fleming said.

Those savings will "be used to increase consumption and help to drive growth as the economy rebounds," he said.

Lower payments and fixed-rate terms also should reduce the risk of future foreclosure, he added.

Moody's on Mods

Servicers that are modifying home loans in private-label securitizations under a Treasury Department program are not following one of the guidelines, according to Moody's Investors Service Inc.

Under the Home Affordable Modification Program, when principal is reduced servicers are encouraged to recognize the loss at the time the loan is rewritten. But Cecilia Lam, a Moody's analyst, wrote in a report released last week that servicers dealing directly with borrowers "have punted the issue" of when to recognize these losses to the master servicers of the pools. Fear of being sued by subordinate bondholders, who stand to lose the most from principal writedowns, may be one reason why servicers have been so sheepish, Lam wrote.

That may explain why most of the modifications for the Obama administration's Home Affordable Modification Program are being done on loans owned or guaranteed by Fannie and Freddie Mac. William Fricke, a Moody's vice president and senior credit officer, analyzed the second servicer performance report released this month by the Treasury and found that 65% of trial modifications were started on loans owned or guaranteed by one of the GSEs.

Quotables …

"The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate. This creates a huge shadow inventory. We estimate this housing overhang at 7 million units, 135% of a full year of existing home sales."

Analysts at Amherst Securities Group LP led by Laurie Goodman, in a note to clients Wednesday.

"There will be death panels enacted by this Congress, but they will be for nonbank financial institutions. … We are talking about dissolutions, not 'resolutions.' We are talking about making it unpleasant for the entities."

Barney Frank, the chairman of the House Financial Services Committee, on the idea of creating a "resolution authority" for systemically important firms, at a hearing Wednesday. (See related story.)

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