Less than two months after the director of the Federal Housing Finance Agency alerted mortgage bankers about a loosening of loan-to-value limitations, higher LTVs have become a reality.
In a speech given during October at the Mortgage Bankers Association’s annual conference in Las Vegas, FHFA Director Melvin L. Watt talked about raising LTV ratios at Fannie Mae and Freddie Mac.
“To increase access for creditworthy but lower-wealth borrowers, FHFA is also working with the enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent,” Watt stated, according to a copy of his prepared speech. “Through these revised guidelines, we believe that the enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account ‘compensating factors.’ ”
On Monday, Fannie and Freddie announced that maximum LTV ratios have been expanded.
Washington-based Fannie said in Selling Guide Announcement SEL-2014-15 that it will now offer a 97 percent LTV option for qualified first-time homebuyers.
Borrowers will need to meet Fannie’s standard eligibility requirements for underwriting, income documentation and risk management standards. At least one co-borrower must be a first-time homebuyer.
Purchase financing loans closed at the higher LTV ratio eliminate risk layering and require full income documentation.
Borrowers who are ineligible for the Home Affordable Refinance Program can use the 97 percent program to refinance under a limited cashout option. These loans need to be run through the Desktop Underwriter automated underwriting system.
The loans, which are available through Fannie’s standard offering or its My Community Mortgage, will require mortgage insurance or some other form of risk sharing.
But the expansion is not intended to be a cure-all for the country’s lethargic real estate market, according to Fannie Mae Executive Vice President for Single Family Underwriting, Pricing and Capital Markets Andrew Bon Salle.
“This option alone will not solve all the challenges around access to credit,” Bon Salle said in a written statement. “Our new 97 percent LTV offering is simply one way we are working to remove barriers for creditworthy borrowers to get a mortgage.”
McLean, Va.-based Freddie issued a statement indicating that its 97 percent loans will be run through the Home Possible Advantage program and are available on purchase financing and refinancing with no cashout.
Watt noted in a statement today that the underwriting guidelines for the 97 percent loans represent a responsible approach.
“To mitigate risk, Fannie Mae and Freddie Mac will use their automated underwriting systems, which include compensating factors to evaluate a borrower’s creditworthiness,” he said. “In addition, the new offerings will also include homeownership counseling, which improves borrower performance. FHFA will monitor the ongoing performance of these loans.”
