The mortgage industry is going through a volatile period, and the product known as jumbo loans is about to become harder to come by. Jumbo loans are mortgages for large amounts, usually $700,000 or more, and fewer banks may wind up willing to lend them. Smaller mortgages may also get harder to approve.
Mortgage underwriting requirements changing dramatically
Freddie and Fannie play a huge role in the mortgage industry. When a bank wants to lend a mortgage, Fannie Mae and Freddie Mac often agree to purchase the loan from the bank and sell it to investors as a security. This increases the amount of available loan capital so banks can lend more. The mortgage houses are becoming far more discriminating, and the mortgage products called “jumbo loans” are on the way out. The amount that qualifies as a jumbo loan has been revised, according to Reuters, to $625,000 from $729,750. This means in October, Fannie and Freddie will no longer back loans of $625,000 or more. Home buyers who want jumbo loans are scrambling to get the mortgages approved before the loans can’t be underwritten anymore.
Mortgages for low income people to suffer as well
Banks are more willing to lend to people when Fannie and Freddie will purchase the loans. New lending requirements being proposed by the Federal Reserve may make it harder for low income buyers to get a mortgages. As a result of the Dodd Frank Act, the Federal Reserve has proposed that an “ability to repay” metric be established as a requirement to get a loan, according to MSNBC. Low income borrowers would be affected, as an already skittish mortgage market is not conducive to lending bad credit loans for housing. Lending mortgages to people who couldn’t pay them back, a criticism often leveled at credit card companies and payday loans lenders, has often been pointed to as one of the chief causes of the housing market crash. The Fed is only taking comments, according to the Wall Street Journal, and is handing over authority to the Consumer Financial Protection Bureau over mortgage lending practices when the agency begins operations in July.
Credit to tighten for housing
Many indicators point toward credit within the housing industry tightening significantly. Underwriting and purchasing requirements at Fannie and Freddie are already becoming far more strict. For a Freddie or Fannie affiliated lender to lend money for a condominium, 70 percent of the condo units in the building must already be sold, according to CNN. That requirement was 51 percent in 2009. The Federal Reserve and National Association of Realtors estimate that 25 percent of all mortgage application are currently denied, and fewer banks are willing to lend without federal backing from Fannie and Freddie.