Because of ongoing weakness in the real estate sector, the institutions that have filled the vacuum left by lenders, have run into trouble… they need to change the rules.

In order to assure that mortgage originations continue, its become necessary for FHA and Fannie Mae to reduce risk. The FHA proposes to increase the net worth requirements of FHA-approved lenders, strengthen lender approval criteria, and make lenders liable for the practices of their correspondent mortgage brokers.

Lender Approval

1.FHA-approved Mortgagees must assume liability for all the loans they originate and/or underwrite
2. Mortgage brokers will no longer receive independent approval for origination eligibility. The FHA-approved mortgagee will have to assume responsibility and liability for the FHA-insured loan underwritten and closed by the approved mortgagee.
3. FHA has required approved mortgagees have a minimum net worth of $250,000. To assure financial vialbility in the future, the proposed rule would require mortgagees maintain a minimum net worth of $1 million in the first year and at least $2.5 million within three years.

New Credit Policy Rule Changes

1. Mortgagees will be required to submit audited annual financial statements to the FHA.
2. Proposed rules to establish new requirements for seasoning, payment history, income verification, and demonstration of net tangible benefit to the borrower
3. A cap maximum on LTV at 125 percent.

Appraisals Rules May Change Too

1. An appraisal will be required in all cases where a borrower wants to add closing costs to the transaction.
2. Mortgage brokers and commission based lender staff are prohibited from ordering appraisals.

Fannie Mae Also Changes The Rules
loans for those who can afford it and prove they can keep it

Data now shows that buyers with lower FICO scores/excessive debt defaulted at rates nine times higher than those with solid FICO scores and more manageable debt load. So beginning Dec. 12, Fannie Mae will reject borrowers who have at least a 20% down payment but a credit score below 620.

Whats it Mean For Buyers and Sellers.

1. Many buyers that were pre qualified may now find they no longer qualify for the price range they had been shopping.
2. Tighter financial requirements may mean they have to settle for less house.
3. Buyers expectations may have to adjust downward, given stricter financing rules.
4. Seller pricing strategies will adjust, buyers will have more trouble meeting new debt-to-income requirements.
5. We should see more private equity come into the market to fill the vacuum and possibly more seller financing.
6. The higher end may suffer as buyers that could have stretched into more home, no longer can.
7. It will hurt the younger person with 20% down, but no credit history.

* Some of these rules may be applied at this writing. The FHA and Fannie Mae web site will have updates and changes to proposals.
*Photo thanks to Queens University Canada

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