Saturday, August 25, 2007

Fannie Mae Steps In

A young friend, let's call him Raul, started working at a large sub-prime mortgage lender as a loan officer exactly six weeks ago. Interesting timing, he finished his three week training exactly as the bottom started falling out of the sub-prime market.

In his first week on the job, he was about to close a 7% fixed rate mortgage (a refinance for someone that had gotten a variable rate loan that had recently ballooned). The house appraisal had been done, credit reports and all information were in. Then, at the last minute, the rate was raised to 11%(!). Raul called the customer to ask if they'd accept the 11% rate. They didn't, and the deal fell through. The customer didn't get his $350 appraisal fee back...

But then, two days ago, a miracle happened. Fannie Mae decided to step in. They would fund the sub-prime loans at a fixed rate of 6.2%. And get this - the debt to equity ratio (the ratio of the customer's monthly debt payment to income) could be as high as 66%(!). In my experience, relevant up to 3 years ago, that ratio could not exceed 33%. And the loan to house value could be up to 90%. Meaning only 10% down is required. The two limitations are that the loan can only be up to $417K (which in California is truly a limitation), and the customer has to provide full income verification, which essentially means having a job. The self-employed need not apply.

But bottom line, Fannie Mae is stepping in try to save the sub-prime loan market, or at least to save the sub-prime lenders, from foreclosure. Raul thinks he'll close three loans this week.


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