Kenneth Harney: New mortgage rules create 'a nightmare to lend' and borrow

WASHINGTON — Mortgage rates and house prices are down — which sounds great for buyers and refinancers. But a series of mortgage industry underwriting and appraisal changes taking effect this month are throwing new hurdles in the way of borrowers and loan officers.

Take Fannie Mae's and Freddie Mac's add-on fees for loans purchased after April 1. In some cases, applicants are being hit with extra fees of 3 to 5 percent because of the type of property they want to buy or refi, their credit scores or the size of their down payment.

Some major lenders that sell loans to Fannie and Freddie are tightening underwriting rules beyond what either corporation requires. For example, as of April 6, Wells Fargo, one of the country's largest mortgage originators, imposed a new minimum FICO credit score of 720 — up from the previous 620 — on all conventional loans purchased through its wholesale system that have less than a 20 percent down payment. It also began requiring a total debt-to-income ratio maximum of 41 percent — down from 45 percent.

For condo loans, Fannie Mae now has an across-the-board three-quarters-of-a-point mandatory fee, no matter how high the applicant's credit score. For a once-popular "interest-only" condo loan with a 20 percent down payment and a borrower credit score of 690, Fannie imposes the following ratcheted sequence of add-ons: one-quarter of 1 percent as an "adverse market" fee; another 1.5 percent for the below-optimal credit score; three-quarters of a percentage point for the interest-only payment feature; and three-quarters of a point because the property is a condo. The total comes to 3.25 percent extra, which can be paid upfront or rolled into the rate.

On top of the extra fees from Fannie and Freddie, borrowers are now starting to get hit with two sets of cost-raising appraisal rule changes. Fannie and Freddie have begun requiring all appraisers to complete an extra "market condition" report that includes detailed statistical analyses of local sales and pricing trends — beyond the regular appraisal data. Many appraisers are charging an extra $45 to $50 for the time required to complete the form. Home buyers and refinancers can expect to pay the higher fees.

On top of that, beginning May 1, Fannie and Freddie are refusing to fund loans with appraisals that do not follow a set of new rules known as the "Home Valuation Code of Conduct." Among the procedural changes: Mortgage brokers no longer can order appraisals directly; they instead must allow lenders or investors to use third-party "appraisal management companies" to assign the job to appraisers in their networks.

How does that affect the consumer? Consider the notification one Connecticut brokerage firm recently received from a major lending partner: Starting April 15, all good-faith estimates provided to applicants must indicate a flat $455 charge for appraisals arranged through the appraisal management company. The broker previously charged $325. Consumers will now have to pay the appraisal fee upfront — before any inspection or valuation is completed — using a credit card, debit card or electronic fund transfer.

What happens if the appraisal comes in low and the applicants can't qualify for the refi or purchase program they sought? They'll have just two choices: Pay another $455 for a second appraisal, with no assurance that it will solve the problem, or cancel the application.

Jeff Lipes, president of Family Choice Mortgage Corp., says the net effect of the underwriting, credit score and pricing changes is to "squeeze some people who are creditworthy by any reasonable standard out of the market."

For instance, as a result of the restrictions on condos, Lipes says that "whenever we hear the word 'condo' (from applicants), we shiver" because the deck is stacked against them. Even for prime borrowers with 800 FICO scores and 50 percent down payments, Lipes said, "I can't tell them that we're certain we can get you a mortgage."

As for refinancing, recent rule changes from Fannie Mae have made some condo units in projects with commercial tenants or high percentages of investor units almost impossible to refinance.

In Naples, Fla., John Calabria, president of Bancmortgage Corp., says "it has become such a nightmare to lend money" because of the layers of add-on fees, higher mandatory down payments and FICO scores. One high-income client sought to put down 25 percent ($200,000) to buy an $800,000 condo as a second home but couldn't because the minimum down payment on such a unit is now 30 percent.

"That's ridiculous," said Calabria. "Some of this just doesn't make sense."

Ken Harney can be reached at kenharney@earthlink.net.

Kenneth Harney: New mortgage rules create 'a nightmare to lend' and borrow 04/17/09 [Last modified: Friday, April 17, 2009 4:30am]

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