New Mortgage Rule Could Hurt Homebuyers

Fannie Mae and Freddie Mac, the two government-sponsored mortgage enterprises, will stop providing money for the following types of loans, beginning January 10, 2014:

1) 40-year mortgages

2) Interest-only payment mortgages

3) Pick-a-Payment” negative amortization loans

4) Any loan with more than 3% in fees and points (total)

I’ll be the first to say, “Good riddance!” to the first three, but let’s look at limiting fees and points to 3%, no exceptions.

Previously, the law limited total fees and points at 7% –unless the borrower signed a waiver form three days before signing the loan documents. That little loophole–the waiver form–enabled lenders to reap a high profit on small loans. Now the pendulum is swinging in the opposite direction.

In states where home prices are high, most loans don’t have an excess of 3% in points and fees anyway, so the new law won’t make a difference.

On a $400,000 loan, 3% = $12,000. That is more than they need to make. (Although some disagree and do charge that much.)

But in states where you can get a decent house for only $50,000, this fee cap could cause a major problem. If total fees cannot exceed $1,500 and the title company charges half that, then $750 does not leave enough profit for the lender to pay the loan officer, loan processor, underwriter, doc draw person, and funder–let alone pay the rent, utilities and management.

Will this cause mortgage lenders put a lower limit on the loan size they’re willing to accept? Already, some limit their loan size to $100,000 or similar. What will happen when the new law cuts down profitability even more?

Homebuyers who want to purchase real estate in the low price range might find themselves hard pressed to locate a lender. They would then have to search for a lender that does not use Fannie Mae or Freddie Mac money. In other words, search for the two or three out of a hundred that have other sources for funds.

On the other hand, this could present an opportunity for more investors to provide private money for small real estate transactions. Private lenders are not subject to rules imposed by the FHFA committee.