The Federal National Mortgage Association, grappling with record high mortgage foreclosures, announced yesterday it will tighten the requirements prospective buyers must meet to qualify for a home loan.
As a result of the changes, some persons shopping for a house, especially those looking for the first time, will find it difficult to obtain a home loan, real estate experts said. Lenders said the Washington area is apt to be hit particularly hard by the new rules because of the high cost of housing here.
David O. Maxwell, chairman and chief executive officer of the association, known as Fannie Mae, said that buyers who put up less than 10 percent of the purchase price as a down payment on their homes will need more income to get a loan after Oct. 1, when the new guidelines take effect.
Holders of loans in this category are five times more likely to default than homeowners who made down payments of 20 percent or more, he said.
Fannie Mae buys mortgages from banks and savings and loans, providing the lenders with money to make additional loans. The company then packages the mortgages and sells securities backed by them on the secondary market.
Fannie Mae no longer will purchase loans that do not meet the new requirements on borrowers' incomes, as well as several types of adjustable-rate mortgages, Maxwell said. As a result, S&Ls and other original lenders are likely to enforce the new standards when evaluating loan applications.
As interest rates have dropped in recent months, growth in home values has slowed dramatically and many buyers who made small down payments have not seen the equity in their homes build. Under these circumstances, homeowners have little to lose through foreclosures.
The purpose of the tightened rules is to give homeowners "more stake in their property" so they "won't walk away from their mortgages," Maxwell said.
At the end of June, a record 1.25 percent of the loans in Fannie Mae's $91 billion portfolio were in foreclosure. The company's loan losses in 1984 were $87.3 million, and reached $47 million in the first six months of 1985.
The national foreclosure rate on all home mortgages stood at 0.24 percent in the first quarter of 1985, topped in recent years only by 0.25 percent rates in 1973 and 1974, and 0.25 percent in the third quarter of last year, according to the Mortgage Bankers Association.
Under Fannie Mae's new rules, the buyer of a $76,500 home who paid 5 percent down would need an annual income of $41,232 to qualify for a loan at 12.2 percent interest. Under the old standards, an income of $36,814 would be needed.
Also, monthly mortgage payments of buyers who pay less than 10 percent down can't exceed 25 percent of their gross income, and 33 percent of their income when added to other installment debt. Under existing guidelines, these figures were 28 percent and 35 percent, respectively.
In other changes, Fannie Mae will limit to 3 percent on fixed-rate loans the amount that sellers, builders, real estate agents or any other "interested party" can contribute to the home purchases in which the down payment is less than 10 percent. Builders, for example, may pay part of the interest rate for the buyer to promote home sales. Such payments would be included in the 3 percent limit. No such contributions will be allowed on adjustable-rate mortgages (ARMs) if the down payment is less than 10 percent.
After Oct. 1, Fannie Mae also will buy only ARMs that have limits on interest rate increases, and will not buy ARMs with graduated-payment provisions, with higher monthly payments in later years. Other restrictions will be placed on gifts -- from relatives or friends, for example -- that buyers can apply toward the purchase of their homes. Purchasers will be required to make at least a 5 percent down payment in addition to any gifts received toward the purchase price. Industry leaders were unable to estimate immediately how many potential buyers would be excluded from the market by Fannie Mae's new rules. But John J. Koelemij, president of the National Association of Home Builders, said his organization fears "Fannie Mae may have gone too far. The new guidelines could disqualify thousands of potential buyers from the housing market."
The actions of Fannie Mae, which buys 10 percent of all home mortgages sold on the secondary market, have a major impact on the mortgage market. Other lenders are expected to follow Fannie Mae's lead in underwriting changes, several industry spokesmen said.
"Now there will be a tightening up by portfolio lenders those who hold the loans they make rather than selling them in the secondary market to follow Fannie Mae," said Dallas Bennewitz, director of mortgage lending for the U.S. League of Savings Institutions.
The trend toward tighter lending restrictions has been going on "for some time," because of high mortgage delinquency and foreclosure rates, according to James C. Christian, who is the chief economist of the league.
"In the 1970s, when inflation was really accelerating, underwriting wasn't perhaps as tight as it might have been. If a borrower got into trouble, the price of the home had already inflated so much he could sell the thing, pay his lender and still walk away with cash. That's much harder to do now," Christian said