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Fannie and Freddie impeding more affordable adjustable-rate mortgages
By Jeff Lazerson
What I think: As mortgage rates ratchet up and home prices continue their skyward climb, homebuyers are obsessing about ways to bring their payments closer to earth.
Adjustable-rate mortgages are garnering attention because there can be as much as a half-point lower rate on a 7/1 ARM compared with a 30-year fixed.
On a $453,100 loan, the principal and interest payment on a 7/1 ARM at 3.625 percent is $2,066. The 30-year at a 4.375 rate is $2,262. The ARM saves the borrower $196 per month, totaling $16,464 in serious savings over the first seven years.
Easy, peasy on the adjustable rate loan qualification to ease the sting of higher rates and home prices, right?
Well, that actually would be wrong as far as Fannie Mae and Freddie Mac are concerned.
This week, one of my loan processors was working up a pre-approval for our client who was buying a condo for $475,000 with 15 percent down. The results from both Fannie Mae’s and Freddie Mac’s black box automated underwriting engineers were stunningly sad.
We priced out using a 4.0 percent start rate on the 7/1 ARM, which meant a principal and interest payment of $1,928. But we are required to qualify adjustable mortgages at 1-year Libor (2.77 percent) plus the margin (2.25), resulting in a qualifying rate of 5.02 percent and a qualifying payment of $2,172.
That’s $244 higher to qualify than her actual payment. For a relatively comparable fixed-rate mortgage, the rate was 4.50 percent.
To get approval of a 7/1 ARM, Freddie Mac required a 25 percent down payment. Freddie debt-to-income ratios (total house payment and monthly bills divided by monthly income) were limited to 45.3 percent.
And, Fannie required a 28 percent down for the green light, with the debt-to-income ratio limited to 44.3 percent.
Using a 30-year Fannie fixed rate at 4.5 percent, we garnered an approval with just 15 percent down and a 49 percent DTI.
Note that FHA and VA qualify their adjustables at the start rate.
History, prejudice and fear. From April 2004 until October 2006, right before the Great Meltdown, well over 70 percent of purchase transactions were financed by various types of adjustable-rate mortgages, according to CoreLogic. Over the past 3 ½ years, ARM’s accounted for 20 percent or fewer purchase-money loans.
Today’s adjustable is a much different, certainly safer animal.
Riskier 1-year and 3-year adjustables are gone. Prepayment penalties for all owner-occupied loans are gone. Negative amortization loans, balloon payments and zero-down ARMs all are gone.
No responses from Fannie, Freddie or their regulator, the Federal Housing Finance Agency, by press time.
Just like the man behind the curtain in the “Wizard of Oz” (pay no attention to the man behind the curtain the wizard boomed), Federal Housing Finance Director Mel Watt needs to push some levers at Fan and Fred to provide parity to a seven-year adjustable-rate mortgage.
The cost of housing is so challenging for so many. Watt needs to be a helper and not a blocker.
If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.
Jeff Lazerson - Mortgage Columnist since 2011