Tuesday, February 17, 2009

Freddie and Fannie Raise Fees Effective April 1

Fannie Mae and Freddie Mac are increasing their mandatory fees and toughening credit score and down payment rules as of April 1.

Under Fannie's and Freddie's new guidelines, even applicants who assumed that their FICO scores would get them favorable rates will be charged more unless they can come up with down payments of 30% or higher. For example, a buyer with a FICO score of 699 who can bring a down payment of about 25% to the table will now get hit with a 1.5% "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.

Applicants who seek to buy a condominium and cannot come up with a 25% 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 buying a traditional detached, stand-alone home.

Fannie and Freddie are no longer the quasi-governmental organizations of yore -- prior to the financial meltdown in September. These institutions are now under federal regulators and are attempting to price the risk of default into the new loans they back.

On the one hand, since the most creditworthy buyers are getting loans -- baskets of these high-quality loans can be sold on the secondary market, freeing up credit. No more toxic debt, this is Grade-A American government-backed debt.

On the other hand, buyers of condos and 2 - 4 unit properties seem to be targeted disproportionately with huge fees. In discussion with other brokers, I've heard of several condo deals falling apart because of these add-ons.

For buyers who have average or below credit, or who are buying a condo or 2 -4 unit residential property, these extra fees will largely neutralize the $8,000 tax credit which was intended as stimulus.

We're returning to a time when those who pose the least risk are rewarded for their financial responsibility. That's good. But now the market must process these new fees, which will only force down prices even more.

Jamie Adner