Mortgage Rates to be Rescued
According to Treasurer Henry Paulson, "Fannie Mae and Freddie Mac are crucial to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance."
Unfortunately, this isn't all good news. Friday's report stated that foreclosures and delinquencies are at all-time highs; Fannie and Freddie are expected to maintain - if not ratchet up -even tighter lending standards. And the fees they have introduced for borrowers with weaker credit histories won't go away anytime soon.
Mortgage rates borrowers pay are dependent on the yields that investors demand when buying mortgage-backed securities from Fannie and Freddie. Investors' doubts about the companies' viability have sent interest rates on those securities soaring. Despite regulators' July promise that they would step in to save the mortgage companies, investors are still demanding rates of 2.25% to 2.45% above Treasuries, LaMalfa said. Historically, the spread has been 1.25%.
High borrowing costs have led, in part, to a decline in mortgage borrowing. Applications are down 27% from a year ago, according to the Mortgage Bankers Association.
Borrowers shouldn't expect the lending tightening to ease though. Defaults and delinquencies are multiplying and home prices are falling. This means Fannie and Freddie will keep a close eye on underwriting practices. Lenders are demanding credit scores above 700 these days, which is up from 620 in the past, and down payments of 20%, up from zero in some cases, experts said.
The mortgage titans have also increased their fees in hopes of shoring up their finances. Just last month, Fannie Mae announced higher surcharges for loans to weaker borrowers. For instance, applicants with credit scores between 640 and 659 who are putting down 15% to 20% will pay an additional 2.25% charge. The same borrower would pay 1.7 percentage points more because of higher fees and rates for the same loan today as he or she would have paid 18 months ago, LaMalfa said.
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