Effective with all loans submitted to Fannie Mae (FNMA) through the Desktop Underwriter (DU) a fair percentage of borrowers will no longer qualify for loans based not on common sense underwriting but rather on an automated decision. Fannie guidelines have allowed total debt ratios to exceed the forty-five percent cap especially when there were other circumstances such as long time established credit, more liquid reserves than normally required or installment loans which have a short time remaining before pay off.
While the president is asking for the banking industry to do more to stem foreclosures the main Government Sponsored Enterprise (GSE), Fannie Mae, has decided to tighten their lending guidelines to people looking to purchase or refinance a home. Resisting the temptation to interject experienced opinion on this subject is difficult at best.
Why does it matter?
Understanding how this will affect existing home sales is very crucial to determining whether or not this is a good move for the economy regardless of whether or not it is healthy for the ailing GSE. As the author wrote recently, "History demonstrates the past management of Fannie Mae, protected by high level Democrat officials, has lead to the possible implosion and demise of this mortgage behemoth. Recognizing something must be done to continue the forward momentum of recent gains in home sales is essential to continuing to rebuild economic viability and consumer confidence."
Demonstrating the recent rise in existing home sales the included chart of data from the National Association of Realtors (NAR) provides hope for some level of recovery. Many of the sales in recent weeks have been attributed to first time home buyers. Many first time home buyers also have student loans they may be paying down which affects their debt ratio and the argument can be made for them to wait. The question, however, is should they wait until housing prices rebound and interest rates rise or should they be allowed to purchase - probably at a monthly cost lower than their current rent - while rates and costs are down?
Determining debt ratios
Debt to income ratios are generally determined only by what is being reported on credit and income taxes. Determining the debt is accomplished simply by adding up all month payments on the applicant's credit and dividing the resulting number by the gross monthly income. As a quick example a person receiving a gross monthly income of thirty-five-hundred and having a monthly debt of one-thousand has a twenty-eight percent debt to income ratio.
Previously the DU engine would allow a total debt ratio, including housing and consumer debt, to slide above the forty-five percent maximum. Likewise the Federal Housing Association (FHA) would insure loans with a debt ratio over that cap. Beginning with loans submitted to the new version of DU, version 8.0, the maximum allowable total debt ratio will be capped at forty five with no exceptions.
The author would be appreciative of your feedback as a comment to this article or by emailing reibroker@gmail.com or telephoning him directly at 678-439-8683
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