It may not be what home buyers, sellers and refinancers want to hear, but they need to know: Fannie Mae and Freddie Mac are ratcheting up their mandatory fees and toughening credit score and down-payment rules as of April 1.
Most major lenders already are pricing in these higher fees, effectively raising costs to borrowers immediately and reducing the impact of housing stimulus efforts from Congress and the Obama administration.
Under Fannie's and Freddie's new guidelines, even applicants who assumed that their FICO credit scores would get them favorable rates will be charged more unless they can come up with down payments of 30 percent or more. For example, a buyer with a 699 FICO score who brings a sizable down payment of about 25 percent to the table will be hit with a 1.5 percent "delivery" fee at closing under the new guidelines.
A buyer with a FICO score between 700 and 720 will pay an extra three-quarters of a point. Even someone with a 739 FICO -- once considered a platinum guarantee of the best rates available -- will get dinged with a quarter-point add-on.
Condominium buyers who cannot come up with a 25 percent down payment will be hit with a three-quarter point add-on penalty, no matter how high their credit score -- simply because they are not purchasing a traditional detached, stand-alone house.
Buyers of duplexes, where one unit is owner-occupied and the other is rented, will be charged a flat 1 percent add-on from Fannie, even if they have FICOs above 800 and make 50 percent down payments. Refinancers who take cash out at settlement also will be forced to pay extra -- as much as three points if they have low credit scores and modest equity stakes.
Both Fannie Mae and Freddie Mac say they are tacking on these extra fees to counter higher risks and losses associated with certain loan products, buyer equity stakes and credit scores. Declining home values in many parts of the country are intensifying losses for both companies when loans go to foreclosure.
Although they were quasi-private enterprises until September, Fannie and Freddie now are operating under federal control and are bleeding billions of dollars of red ink. Freddie spokesman Brad German said that some of the loan categories and credit risk combinations targeted in the latest round of fees "default at four to eight times" the rate of other mortgages in the company's portfolio. "We have to manage these risks appropriately," he added, and that means pricing them based on the probability of higher losses.
However, real estate agents, mortgage bankers and brokers are incensed at the new round of fee increases, calling them counterproductive in an environment in which housing needs help, not new impediments. They have begun lobbying Congress and the two companies' federal overseers to scrap the latest add-ons.
Charles McMillan, president of the National Association of Realtors, complained in a letter to the Federal Housing Finance Agency, the regulator of Fannie and Freddie, that the individual fee increases weren't justified, and that in combination they could seriously deter home purchases. He said, "A borrower with a credit score of 670 making a 20 percent down payment for a condominium would have the fee raised from 150 basis points (1.5 percent) to 350 basis points (3.5 percent) -- more than double" under Fannie Mae's new schedule.
"They're shooting themselves in the foot," said Steve Stamets, a mortgage loan officer in Rockville. With substantial down payments of 20 percent and more, Stamets said, "they don't need to be that tough," even if home prices decline slightly more before the cycle ends.
"When consumers with 720 credit scores are being adjusted, there is something seriously wrong with the system," said Harry H. Dinham, a Dallas mortgage company owner and former president of the National Association of Mortgage Brokers.
As recently as two years ago, FICO scores in the upper 600s were enough to qualify any applicant for prime financing. Now scores of 720 to 740 are the bare minimum if you're going to escape add-on fees -- and still not good enough if you choose to buy a condo or a duplex.
Where is all this headed? Without congressional intervention or new marching orders from the companies' regulator, the add-on fees are here to stay.
But there's an alternative available for just about anyone who wants to avoid the fees: Federal Housing Administration mortgages, where down payments go as low as 3.5 percent and credit scores are not an issue for most applicants.