Getting a home loan is about to get easier. That’s because Fannie Mae and Freddie Mac, the two government-backed residential finance giants that backstop a majority of all home loans, have put new lending guidelines in place that should make it easier for borrowers to secure loans. Not only are the two agencies lowering downpayment requirements, but more importantly, they have clarified when lenders will be on the hook if borrowers default. In the past, Fannie and Freddie have been able to force lenders to buy back loans that have defaulted soon after it was issued, if any mistakes were made in the paperwork or if there was borrower fraud. Mel Watt, the head of the Federal Housing Finance Agency, acknowledged that the previous policy made it hard for lenders to understand exactly when Fannie Mae or Freddie Mac would require the banks to repurchase loans. Under the new rules, any loans with no missed payments for 36 consecutive months after they were first issued will be backed by Freddie or Fannie should they default. The agencies will also allow two missed payments in the first 36 months without forcing borrowers into foreclosure. And if private mortgage insurance, which is required for all low downpayment loans, is rescinded, say due to errors made in the underwriting process, lenders will not automatically be required to repurchase the loans. According to Lawrence Yun, chief economist for the National Association of Realtors, the buyback issue has been “the number one hindrance to residential lending lately. If it disappears, it would be a big boost to residential lending.” Freddie and Fannie have also said they will start backing 3% down loans. Borrowers can currently get 3.5% down loans from the FHA, although they require borrowers to pay expensive mortgage insurance premiums for the life of their loans. The new low down payment loans should help boost homebuying among low-income and first-time homebuyers, who have been conspicuously absent from the housing market over the past year. Lenders already seem to be loosening up a bit. Mark Palim, who oversees economic and strategic research at Fannie Mae, said average credit scores for approved loan applications have dropped slightly over the past few months and lenders are doling out loans with lower downpayments as well. Source: CNN/Money

Note: We expect to release more details about the Fannie Mae and Freddie Mac 3.0% down programs as they become available.

The popularity of adjustable rate mortgages (ARMs) rises and falls depending upon the overall direction of interest rates as well as the spread between fixed rate mortgages and adjustables. There are many reasons why one might opt for an adjustable rate mortgage. In analyzing whether you might be a viable candidate for an adjustable, there are many facets you may want to consider before making a decision:

What is the current interest rate spread between a fixed rate and an adjustable? Fixed mortgage rates are based upon long-term interest rates while most adjustables are based upon short-term rates. For example, a one-year adjustable will typically be priced off current one year “T” bills. Short-term rates are typically lower than long-term rates, which is why adjustables will have starting rates below fixed rate loans. The difference between the two—the spread–is not always the same.  If fixed rates are at 6.0% and a one-year adjustable starts at 2.0%, the benefit is clearly seen. If the adjustable starts at 4.5%, the choice is not so clear.  Continue reading →