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Calm returns for big lenders

The federal government calmed the financial markets Monday with rescue plans for the nation's two biggest mortgage finance companies, Fannie Mae and Freddie Mac.

That means life can go on as normal — the new normal — where you need to have good credit and a verifiable income to get a conventional mortgage at a reasonable rate.

"The Fed and the Treasury averted a disaster by stepping up and making available any capital that Fannie Mae or Freddie Mac might need," said Greg McBride, senior analyst at in North Palm Beach. "If they had not taken that step, we would have seen a significant increase in interest rates and a major curtailment in mortgage credit."

However, nobody expects the deal to resurrect the days of easy credit that got mortgage holders into trouble in the first place.

"The real freewheeling days have disappeared," said Rim Karnavicious, mortgage specialist with First State Bank in St. Petersburg. "They reward only pristine credit."

Like most lenders, First State Bank doesn't hold onto the mortgages it makes. It sells its loans, then turns around and lends the money out again to other customers. Keeping this cycle going means making loans that other institutions are willing to buy. Now that mortgage financing has dried up on Wall Street, the marketable loans are those that qualify for purchase by Fannie Mae and Freddie Mac, known as conventional mortgages, or for government backing, such as FHA loans.

However, making a qualifying loan has become tougher and tougher as the mortgage crisis has deepened.

"Almost every couple of weeks they'll tighten up the guidelines in some form," said Scott Strepina, owner of Benjamin Ruth Mortgage, a Tampa mortgage broker. "Right now you've got to be a real strong candidate for a conventional loan. They've layered on these credit score criteria to segregate borrowers."

He said someone with a 700 credit score might be offered an interest rate half a percentage point higher than someone with a 720 score (out of a maximum of 850). "Before, it used to be if you were 680, you'd qualify for the best rate out there."

FHA-insured loans have more generous credit standards, but even they have adopted risk-based pricing, charging higher insurance premiums for borrowers with lower credit ratings.

Analyst McBride said about 80 percent of the mortgage loans written this year have been done to conform with Fannie Mae or Freddie Mac guidelines. "That's why Treasury took the steps it did," he said.

Key points in the government's bailout plan include:

• The Federal Reserve is giving the Federal Reserve Bank of New York authority to lend money to the two companies at the same rate as that of commercial banks, 2.25 percent.

• The Treasury is asking Congress for authority to expand the $2.25-billion line of credit it now extends to each of the two companies and to buy their shares if necessary.

The news won a mixed reaction on Wall Street — relief that a crisis had been averted combined with concern that the taxpayers are on the hook.

On Monday, Freddie Mac attracted more bidders than it had all year for one of its regular debt auctions, which raised $3-billion in short-term securities. And both companies' stocks rose early in the day before slipping. Fannie Mae shares closed down 5 percent, while Freddie Mac shares were down 8 percent.

"If the government hadn't moved and Fannie and Freddie failed, the cost to taxpayers and the overall economy would be enormous," said Mark Zandi, chief economist at Moody's

If Fannie and Freddie were unable to play their huge roles in financing new mortgages, the housing market would only suffer more, he said — not to mention the turmoil for the financial institutions around the world that invest in Fannie and Freddie's debt securities.

Although they are private companies, Fannie Mae and Freddie Mac were created by Congress to make home ownership more affordable. Fannie Mae, created in 1938, stands for Federal National Mortgage Association and Freddie Mac, created in 1970, for Federal Home Loan Mortgage Corp.

For mortgage lenders, Monday was business as usual.

"We're still doing business with them," said Charles Richardson, president of the mortgage division for HomeBanc in Tampa. "They're such a critical wheel. There's no way they're going to go under. It would shut down the secondary market. Lenders would only have the ability to lend based on their portfolio, which would all go rather quickly."

Information from Times wires was used in this report. Helen Huntley can be reached at or (727) 893-8230.

Qualifying for a conventional mortgage loan

Two years ago / Now

Minimum credit score: 580 / 620-680*

To get the best rate: 680 / 720

Down payment: 05%**

Proof of income: None / Full documentation

Debt to income: up to 65% / up to 55%

*Costs significantly higher below 680 where loans are available
**Insurance required if down payment less than 20%

Source: Benjamin Ruth Mortgage

Calm returns for big lenders 07/14/08 [Last modified: Tuesday, July 15, 2008 5:35pm]
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