Fannie Mae raised the bar for mortgage applicants this past weekend. Getting approved for a home loan just got harder.

In its official announcement, Fannie Mae says the updates minimize long-term lending risks. If that's the case, this won't be the last guideline change Fannie Mae makes -- especially with loans defaulting at an above-normal clip.

The immediate changes are major. The first pertains to credit scores.

Effective December 13, 2009, the bulk of Fannie Mae's loans require a 620 credit score minimum. There are very few exceptions.

A second relates to loans with private mortgage insurance.

Homeowners whose loan-to-value exceeds 80 percent now have a choice:

1. Pay higher mortgage insurance premiums month-after-month
2. Pay a one-time fee paid at closing to compensate for higher risk

Both options result in higher consumer loan costs.

A third change concerns maximum debt-to-income ratio. Fannie Mae will no longer approve loans with debt ratios exceeding 45 percent except with very strong assets and very high credit scores.

In no case whatsoever may debt-to-income exceed 50 percent.

There are other changes, too, including the elimination of seldom-used mortgage products and additional risk-based fees for "expanded level" mortgage approvals. These updates affect just a small part of the population.

So, home prices are rebounding, mortgage rates are low, and -- for 5 more months at least -- there's a federal tax credit for qualified buyers. You don't have to buy a home now, but with mortgage guidelines sure to tighten in 2010, now may be a better time than later.

The best "deal" won't matter if you can't get qualified on your mortgage.

Getting approved for a mortgage is about to harder.

For the second time in less than 3 months, Fannie Mae announced changes to its mortgage guidelines.

In its official announcement, Fannie Mae details the updates, meant to reduce the mortgage firm's overall risk.

The first major change is with respect to credit scoring. All Fannie Mae loans -- whether underwritten electronically or manually -- require a 620 credit score minimum. There are very few exceptions.

A second change relates to loans with private mortgage insurance. Homeowners whose loan-to-value exceeds 80 percent now have a choice:

1. Accept higher mortgage insurance premiums month-after-month
2. Accept a one-time fee paid at closing to compensate for higher risk

Both options pass higher costs to consumers.

Then, a third change relates to maximum debt-to-income ratio. As announced in a separate document, Fannie Mae will no longer approve expense ratios exceeding 45 percent except with very strong assets and credit to back it up. In no case can expense ratios exceed 50 percent.

There are other changes, too, including the elimination of seldom-used mortgage products and new risk-based pricing on "expanded level" approvals.

Fannie Mae implements its updates during the weekend of December 12.

Therefore, if you're going to need (or want) a new mortgage later this year, consider moving up your timeframe to October or November. Once the guidelines change, getting approved for a mortgage is going to be tougher.

I have noticed a lot of comments about the possibility of a deficiency balance after a short sale.  I have also received numerous email questions and telephone calls from agents and investors asking about what to do if the bank release does not specifically state that the short sale is in full satisfaction of the debt.

It used to be that the SMIs would state specifically in the bank release documents various wording that would indicate that the short payoff is a forgiveness of any deficiency balance, or that it is in full satisfaction of the debt.

However, this past fall, we’ve noticed a gradual change in the wording, first they would not specifically state that it is in full satisfaction of the debt, but the SMIs would generally not permit the servicing lenders to go after the deficiency balance.  Now more of the release documents state specifically that it is not in full satisfaction and they specifically leave open the possibility of seeking the deficiency balance even though in fact they do not pursue it.

Historically, short sales and foreclosures generally did not involve a deficiency balance because most properties in the past appreciated so fast that a resultant sale would bring in more than the balance on the loan plus all costs.  Indeed many REOs if kept long enough would often appreciate so fast that all a lender needed to do was keep it for a while and they could get their money out of it. There were many exceptions of course, but it was not uncommon in certain parts of the country.

Pursuing the deficiency

The policy whether the servicing lender could or would go after the deficiency balance first starts with the servicing agreement between them and the SMI who owns the loan.  I have seen a number of different terms, with no clear policy, leaving the decision either with the SMI or the servicing lender or the servicing lender must consult with the SMI.

Next, the policy decision goes through a public relations and political analysis.  With the federal government so actively involved in the explosion of foreclosures, bailout programs, and attempts to reduce foreclosures, there is presently negative pressure on lenders to not pursue deficiency balances.  There were more than 70 bank failures this year and many banks are still on the edge, so they are experiencing contradictory pressures to pursue deficiencies and to leave them alone.  This pressure will help determine whether to go after only the most egregious cases or to expand the criteria.

Finally, the decision for pursuing a deficiency balance involves the nexus between the capacity of their legal, bankruptcy, and collections departments and the facts of each case.  A certain predictable percentage of their customers will file bankruptcies, so these entities will determine how many and which customers to pursue for the deficiency.

The customers they are likely to pursue are customers against whom the lenders believe they may be able to collect.  If the servicing lender owns the note, they may be more aggressive.  I recently had a case in which the second mortgage holder, who also owned the note, refused to permit a release of lien for a widowed man in his late 60’s, medically retired and dying from asbestos related cancer, with no assets beyond his exemptions, and living off of exempt medical retirement income.  He is judgment proof and therefore uncollectible, but they pursued him merely because they did not like this debtor.

Normally, though, the decision to pursue is based upon the collectibility of the debtor.  A medical doctor in his 40’s, with a good income who ended up in financial trouble when he lost business because of mismanagement of the clinic for whom he worked, who has now moved to a new area and set up practice, can be rehabilitated in a relative short period of time.  The deficiency is large, so they will likely pursue this customer.

However, a factory worker and spouse, one of whom is suffering from a deteriorating medical condition, who live from payday to payday with a deficiency balance of $30,000 may likely be left alone.  Don’t get hung up on the dollar amount quoted, because each entity will establish their cutoffs.

How to know when the borrower is in the clear

The current common practice to leave open the possibility of pursing the deficiency balance does not leave the borrowers hanging out there forever in fear of a lawsuit any moment for the balance.  Each state has laws called “Statutes of Limitations” or “Limitations on Actions”.  These are laws that place a time limit after which the creditor can no longer sue a debtor for a debt.  One state has a statute of limitation for contracts of 6 years.  Other states have shorter or longer periods of time.  Even the IRS does not collect tax debts after 10 years, with exceptions.

However, you will say, 6 years is a very long time.  This is true, but there are some ways to know sooner.

First, if the lender required a Promissory Note for part of the deficiency, it is highly unlikely that they will seek more.  Indeed, if they did, the lender may face some legal trouble, for which they are fully aware.

Secondly, if a lender is going to seek a deficiency, it most likely will occur within the first year.  Each year, in January, the lenders must issue their 1099s.  A 1099 is the form they use to report to the IRS the amount that has been forgiven in a short sale or foreclosure.  So, if the borrowers receive a 1099 for the deficiency balance, the lender may be “estopped” thereafter from pursuing the debtors.  The lender receives a tax benefit from the forgiveness, and the borrower may incur a taxable event as a result, so the lender may be estopped from further action.  For most borrowers, that taxable event is not real, but only potential because the lender does not know if it is or not.

Third, the current practice is to request a promissory note for part of the deficiency.  So it is currently safe to assume, in most cases (there are exceptions), that if there is no promissory note demanded as a condition to approval, there will not be a deficiency balance sought.

This is only a guide, and in no event should be relied upon, because there are differences around the country and with specific lenders and SMIs.  I am not providing legal advice, only general, very general information.

Please note: I have endeavored to provide general guidelines.  Because there are a lot of SMIs, and even greater numbers of servicing lenders, many thousands of varying loan products, and often different procedures in different states or regions, many of you may find cases that deviate from the above discussion.  Please keep this in mind.

This article has been published with permission of Ken Lawson, JD of TheLawsonGroup Mediation Services.  The opinions expressed herein are those of Ken Lawson and do not necessarily reflect the opinions of Bryan Ellis or WebWords Inc.  Similarly, publication of this article does not indicate endorsement of the content of this website by Ken Lawson.

Waiver of Requirements of 24 CFR 203.37a (b)(2)

Pursuant to §7(q) of the Department of Housing and Urban Development Act (42 USC 3535(q) and 24 CFR 5.110, I hereby waive §203.37a(b)(2) of the regulations. That regulation prohibits a mortgage from being insured by FHA if the sale of the property that will be the security for the mortgage is within 90 days of acquisition by the seller. This waiver is limited to a sale within the 90-day period if the property is acquired through foreclosure, and is effective for a period of one year. In support of the waiver, I make the following Findings and Determinations.

FINDINGS

1. Section 203.37a(b)(2) of the FHA regulations provides that the mortgage for a property will not be insured by FHA if the contract of sale is executed within 90 days of the acquisition of the property by the seller. One of several exceptions to this 90-day prohibition is contained in 203.37a(c)(6), which allows mortgage insurance for properties sold by state-and federally-chartered financial institutions and government-sponsored enterprises (e.g., Fannie Mae and Freddie Mac). The properties sold by these entities are usually obtained by foreclosure.

2. Since the promulgation of §203.37a in 2003, FHA has learned that 1) there is considerable difficulty in determining which mortgagees and/or servicing lenders that have sold properties acquired through foreclosure are state-or federallychartered, and 2) many of the mortgagees covered by the existing exemption transfer titles to such properties to subsidiaries or vendors for the purpose of selling the properties, and those subsidiaries and vendors are not currently covered by the exemption.

3. Since the promulgation of §203.37a, the volume of foreclosures has increased dramatically, especially in the past year. In examining its policy regarding the 90 day prohibition contained in §203.37a, FHA finds that a temporary relaxation of its eligible propel1y requirements also can help address the mortgage crisis.

4. FHA finds that in addressing specific cases related to the mortgage crisis, waiving the regulations so that properties acquired by foreclosure by mortgagees that are not state-or federally-chartered would allow the properties to become eligible for FHA-insured financing during the 90-day period. This would reduce holding costs to mortgage lenders. An expansion of the exemption will result in a lessening of the likelihood of property value deterioration to adjoining and near-by properties as well as to the properties acquired by foreclosure.

5. FHA can have a very significant role in helping the housing market stabilize, providing liquidity in the mortgage market, and increasing mortgage credit, both nationally and in those states suffering the most from the SUb-prime mortgage meltdown.

6. The current exemptions from the 90-day restriction in §203.37a(c) are insufficient to accommodate sales of properties acquired as the result of foreclosure by mortgage lenders other than those currently exempted, and do not accommodate exempt institutions that use subsidiaries and vendors to sell their inventory of foreclosed properties.

7. Section 203.37a creates an unwarranted disparity between mortgagees that are state-or federally-chartered and mortgagees that are not so chartered. Section 203.37a also inhibits FHA’s ability to provide access to safe and affordable mortgages for purchasers of these properties during the 90-day period.

DETERMINATIONS

1. Additional exemptions to the 90-day sale period must be granted for sales of real estate owned by mortgagees to reduce deterioration in properties acquired through foreclosure that may otherwise remain vacant for up to 90 days because of FHA’s existing policy. This waiver also adds to the existing exemptions those properties foreclosed on by mortgagees, their subsidiaries, as well as vendors hired by exempt entities to sell their real estate owned.

2. The most expeditious means of effectuating such additional exemptions is by waiving §203.37a(b)(2). A waiver of §203.37a(b)(2) will not violate any statutory requirements.

3. The above-findings constitute good cause for the waiver, as required by 24 CFR 5.110.

4. The waiver shall expire one year from today’s date.

WAIVER

Section 203.37a(b)(2) of the FHA regulations, 24 CFR 203.37a(b)(2), is hereby waived for a period of one year from today’s date with regard to sales of properties acquired by mortgagees, whether sold directly by the mortgagees or by their subsidiaries or by vendors to whom they have transferred titles to properties for the purpose of effectuating sales of those properties.

Brian D. Montgomery
Assistant Secretary For Housing
Federal Housing Commissioner