For many industry professionals, this is old news (say, a week or two). For many consumers, it may be unwelcome news.
Loan underwriting guideline changes are coming soon to a neighborhood near you. First Capital had this to say:
Effective August 12, 2007, The Office of Federal Housing Enterprise Oversight (OFHEO), the agency which oversees Freddie Mac and Fannie Mae, has announced key underwriting changes that will have a substantial impact on the way borrowers are qualified for interest only and some adjustable rate mortgage loans. These changes will have a dramatic impact on purchasing power. Lenders nationwide will now be required to qualify borrowers applying for interest only loans at the fully amortized rate; those applying for an adjustable rate mortgage (with the potential for negative amortization) must now qualify at the fully indexed rate.
They gave the example of a 5-year fixed, full-doc, interest-only loan at 6.375% for a buyer with a 740 FICO score. Currently underwriting guildelines would result in purchase power for this buyer of approximately $700,000, while the new guidelines will result in buying power for this same buyer of $570,000. Put that calculator down: That’s a reduction of 20%.
Oh, and another thing:
Additionally, borrowers applying for negatively amortized loans will need to qualify for an even higher loan amount (typically 120% of the original loan) since the potential for negative amortization exists. A borrower applying for a $100k loan, for example, will need to be qualified at $120k, using the fully indexed rate.
Now clearly, having been burned, Feds are trying to return some sanity to lending practices, to protect the lenders and to protect buyers (often, from themselves). But, do you think this might have an impact on the overall real estate market?
Yeah – Me too.
(For the record, Rhonda Porter did a great job covering this a little over a week ago at Rain City Guide. Since I just received the First Capital report today, I thought it was worth revisiting here in case one of our three readers missed it).