Fannie Mae will ease financial standards for mortgage applicants next month as posted by the Washington Post. I’ll start with the good………………..but you need to read to the bottom to get to the bad.
The article points out that the debt-to-income ratio (previously explained by Greater Home Loans) for Fannie Mae backed securities was set at 45% (43% with exceptions to 45%). Let’s take a look at this using today’s interest rates.
- Income $8,000.00 per month gross
- Monthly car payments and credit card debts totaling $1000 per month.
- No other income sources or monthly debts.
- 3.875% 30 year fixed interest rate
- 1.25% property taxes
- $1000.00 annual insurance
- NO association dues
- Credit score as it would affect the borrower the same in either situation (unless compensating factors are needed)
- Down payment, as we will be addressing only payments based on loan amount – not purchase price.
Example 1: A debt ratio of 45%, using the data above, meant they could carry no more than $3,600.00 in total debts including a home. $3600.00 minus their existing $1000.00 of monthly debt leaves them with $2600.00 of qualifying mortgage PITIA (mortgage Principal, Interest, Taxes, Insurance, and Association Dues). What does $2600.00 get you in borrowing power? It gets you a mortgage of approximately $438,000.00.
Example 2: The new acceptable debt ratio of 50% means you are allowed to have $4000.00 in total debts minus the $1000.00 existing = $3000.00 of purchasing power. $3000 monthly payment gets you a mortgage of approximately $508,000.00.
In San Diego, with home prices exceeding the national average by thousands, the ability to qualify for a home $70,000 more opens the market for you as shoppers.
Analysis • Desire • Reality
As a mortgage broker, the prospect of helping more Americans achieve home ownership excites me. It allows me to help my Realtor partners sell more homes. It helps buyers who were on the cusp get off the cusp and qualify. All good.
The article also mentions that there was a study performed that shows no significant default presence between borrowers at 45% debt ratio to borrowers at 50% debt ratio. Meaning if you aren’t going to pay your mortgage at 45%, you are the same people who won’t pay at 50% – no change.
So far so good. More buyers – no additional risks. All good. In fact the article does not mention any downside to the July 29th change. In fact; they believe that millennials will benefit since their incomes are tight early in their careers with growth potential and salary increases are sure to happen in the future. Their income increases the banks risk decreases. Even better.
The economist in me is a little concerned that the Washington Post would not dig a little deeper. As my parents would say “not all that glitters is gold”. Here are my concerns:
1.Arbitrary decisions by an institution (not the federal reserve) to increase purchasing power by thousands of dollars per transaction may create a bubble. Bubbles tend to pop. A bubble is created when no significant change in concrete economic figures exist, yet purchasing power increases. I make the same money but now I can afford more house.
2. IF I can afford more house, what happens? Will Realtors steer you into different neighborhoods where home prices are currently higher? Will I go from Lemon Grove to La Mesa? OR will Realtors tell sellers in Lemon Grove to increase their asking prices since more people can afford them now? OR will the influx of additional buyers drive up home prices through multiple offers? Anyway I look at it, the price of homes will increase because of this new policy.
3. Higher home prices, in itself, is not bad. The bad happens when the new policy fails, and is reduced back down. The bad happens when the policy does not fail, but the new executive changes the policy back down. Changing the arbitrary policy will immediately make the affordable, unaffordable. To compensate from the reduction of buyers created by decreases the debt ratio, home prices will fall.
4. Doom and gloom…..I know. Here’s the thing, if the policy is reduced again in the future, it will only be because something is not working. If that something is the economy, then pouring gasoline on it will exasperate the problem. Bad happens, but bad on top of bad is really bad.
5. If the decision by Fannie Mae was to spur mortgage applications, which have slowed because of slightly higher interest rates, then it’s about profits now and worry later.
6. If the decision by Fannie Mae was to offset rising interest rates, which weakens purchasing power, then it’s about profits now and worry later.
What do you think?