The Federal Home Loan Mortgage Corp. issued revised underwriting guidelines this week for residential financing, increasing a borrower's permissible debt-to-income ratio and barring consideration of a property's remaining economic life over five years.
Although the guidelines are not intended for primary lenders-the financial institutions that make loans to home buyers-they are certain to affect residential lending practices across the country. The guidelines are intended to set standards for the type of investment quality loans the Mortgage Corporation (familiarly known as Freddie Mac) will buy from primary lenders.
Yet, because many financial institutions sell their loans in this secondary governmental market to generate funds to make more loans, the loans they wish the sell must be consistent with federal standard. Fredding Mac, a part of the Federal Home Loan Bank Board, purchased $6.5 billion in mortgage loans last year, thus helping finance about 156,000 single-family homes.
In previous guidelines, the Mortgage Corp. subscribed to the lending industry's rule of thumb that mortgage payments, property taxes and insurance should not exceed more than 25 percent of the borrower's monthly income. That provision has been liberalized to read, "Generally the monthly housing expense should fall within a range of 25 to 28 percent of the stable monthly income of the borrower." Total monthly debt payments may now fall within a range of 33 to 36 percent of stable income, instead of a flat 33 percent.
Moreover, the guidelines state that "higher ratios may be justified by other considerations," such as the domonstrated ability of the borrower to devote a greater portion of income to housing, a good credit history, a large downpayment, a good job, or substantial net worth.
On the appraisal side, Freddie Mac has decided to eliminate consideration of the remaining economic life of a building unless it is shown as five years or less. Remaining economic life is defined as the period of time in which the existing improvements on the property add value above the estimated vacant land value. The Mortgage Corp. found such estimates, being subjective, are difficult to support as the number of years increases. The change backs up the corporation's policy not to discourage lending on older buildings, a form of red-lining.