According to CNNMoney, obtaining a mortgage is about to get more expensive and more difficult.
Fannie Mae guarantees mortgages. It is in financial trouble. It is taking steps to shore up its finances. The end result, however, is that you are going to pay more for taking out a mortgage.
Fannie in announcing announcing a $2.3 billion loss said it would make major changes that could have a significant effect on mortgage liquidity and pricing.
The company said it will increase its fees, stop buying certain high-risk loans and charge a higher risk premium for buying loans in the declining market.
Fannie increased fees for some loans by a quarter of a percentage point, based on borrowers' credit scores and the amount of their down payments. It will charge, for example, 1% (up from 0.75%) for a buyer with a credit score of 680 paying 20% down.
Fannie also doubled its "adverse market delivery charge" to 0.5%. That is an across-the-board fee assessed against every loan Fannie buys, according to a Fannie spokeswoman. Fannie first instituted the charge this spring.
"It's very negative," said Lawrence Yun, chief economist for the National Association of Realtors. "Any time there's an additional imposition of fees in obtaining a mortgage, it knocks some potential buyers out of the market."
Fannie's smaller cousin, Freddie Mac, which has also announced big losses, has been taking similar steps to shore up in finances and reduce its exposure to risky loans.
The additional fees imposed by Fannie will hit newcomers particularly hard because first-time buyers are usually most on the margins and struggling to afford a home purchase. The added fees will be passed on to borrowers and could mean quarter-point increases in interest rates.
Reducing the number of first-time buyers can have a domino effect on the market. Existing homeowners looking to trade up to bigger, more expensive homes may postpone doing so because they can't sell their present home.
Fannie will also eliminate buying Alt-A loans by the end of 2008. Alt-A loans, a category between prime and subprime, accounted for about 11% of the company's loans during the last years of the boom. They have been used mostly by people who couldn't or wouldn't document their incomes, their assets or both. These buyers will find it harder to obtain financing once Fannie stops buying the loans.
The cutback in Alt-A, however, will hurt people buying second homes to rent out or resell, rather than first time homeowners. Removing some of them from the market will decrease demand in a market already struggling with high inventory.
Fannie and Freddie, as private companies created and sponsored by the government, have to foster home ownership while satisfying their shareholders. They have to maintain profitability or risk triggering a government rescue.
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