Mortgage Daily Logo
mortgage news from industry experts

Conforming Cash-out Changes

Conforming Cash-out ChangesFannie revises refinance guidelines and pricing

September 25, 2002

By SAM GARCIA

The nation’s biggest mortgage player is making some not-so-good changes to its guidelines for cash-out mortgages.In an announcement yesterday about eligibility standards for refinance mortgages, Fannie Mae said it will raise its pricing on cash-out refinance loans. The changes will affect mortgages delivered on or after February 1, 2003. The price increases on cash-out loans, which have been recently cited as a source of strength in an otherwise weak economy, range from 0.25% to 0.50%.

In addition, Fannie said loans where a first lien and nonpurchase-money second lien are consolidated will now be treated as cash-out. Previously, these loans were treated as limited cash-out refinance loans. This change also takes effect on February 1st of next year.

To qualify for the revised limited cash-out refinance category, only an existing first mortgage, purchase-money second mortgage, closing costs and less than 2% cash back to the borrower (up to $2,000) can be financed in the new loan. Lenders will now need to provide written confirmation, such as a HUD-1 settlement statement, that the proceeds of a subordinate lien were used to purchase the property.

On the upside, Fannie said it will expand the loan-to-value ratios on limited cash-out refinances to the same level as purchase money mortgages, which are as high as 100%.

The changes are the result of an extensive assessment by Fannie of the credit risks associated with various types of refinance mortgages. The company said a refinance loan where the balance increases in the neighborhood of 20% or more from the prior balance is three times more likely to default than a refinance that increased the balance 3% or less. In addition, Fannie noted that inaccurate appraisal values are more likely to occur in a cash-out transaction.

Fannie said that its Desktop Underwriter will be updated in December to reflect the pricing changes.

The Washington D.C.-based company said its goal is to align its “eligibility and pricing policies more closely with the risk profile of the particular mortgage transaction.”

Freddie Mac, one of two other government sponsored housing enterprises (GSE’s) (the Federal Home Loan Bank is the third), reported in its second quarter refinance survey that 67% of sampled refinance loans it purchased included at least 5% cash-out.

FM Watch, the coalition of banks and mortgage companies that attempt to keep the GSE’s on a level playing field in terms of cost of funds, previously criticized the GSE’s for home equity lending. Gerald L. Friedman, chairman of the group, noted at a previous subprime conference that it was not congress’s intention for Fannie or Freddie to purchase loans used to finance personal and household goods — such as cash-out loans.

The Wall Street Journal (WSJ) has been a regular critic of the mortgage giant recently, saying that Fannie is exposed to too much interest-rate risk. A recent announcement from the mortgage giant, indicating that its duration gap — a measure of how well its interest-rate risk is hedged — widened to 14 months compared to its target range of about six months, was recently cited by WSJ as further evidence of excessive exposure.

Fannie’s decision affects a significant portion of the total mortgage industry. The company reported that business volume — which is the mortgages it purchased for portfolio plus mortgage-backed security issues acquired by other investors — was $159.8 billion during the second quarter of this year. On an annualized basis, this equates to $639.2 billion — a pretty big chunk of the total $2.18 trillion U.S. production currently estimated by the Mortgage Bankers Association of America for the industry this year.


Sam Garcia has been in mortgage lending since 1980, and is publisher of MortgageDaily.com. He also owns and operates CloseNow.com, a real estate portal site.

email: SamGarcia@MortgageDaily.com

Popular posts

How Long Does It Take to Refinance a Mortgage
How Long Does It Take to Refinance a Mortgage

So, you’re interested in refinancing your mortgage. Maybe you want some extra capital to do that home project you’ve always dreamed of, interest rates are nearing record lows, or you want to start consolidating debt. Regardless of the motivation behind the refinance,...

How Does Refinancing a Mortgage Work
How Does Refinancing a Mortgage Work

A home purchase is considered an investment, and a robust one at that. Savvy owners are constantly looking for new ways to reduce debt, save money, pay less in interest, and ultimately build equity. Refinancing is one way to leverage your investment and do just that....

What Does It Mean to Refinance Your Home
What Does It Mean to Refinance Your Home

You can think of refinancing your mortgage as a debt redo. Essentially, you’ll swap out the existing loan for a new one - ideally with better terms and conditions. Only this time it could help you save money on high mortgage payments, rather than just borrow it....

Setting up the Utilities in My New House
Setting up the Utilities in My New House

All the tedious, time-consuming home closing documents have been signed, sealed, and delivered. Your belongings are packed into what seems like a million boxes and you have a solid plan to haul all your existing furniture to the new place. Just as your boxes and...

When Is My First Mortgage Payment Due?
When Is My First Mortgage Payment Due?

Navigating your way through a brand new mortgage loan can be a difficult task, especially for first time homeowners. After handing over a large sum of money for the down payment and closing costs, it’s important to pay attention to the timing of your first mortgage...

Newsletter

Don’t worry, we don’t spam

calculate your monthly mortgage payment

Related Topics

Helpful Links

Daily mortgage rate trends

Best mortgage lenders

First-time homebuyers programs by state

Loan limits by state

Types of mortgages

APR vs interest rate

Understanding PMI

Related Posts

THE TRUSTED PROVIDER OF ACCURATE RATES AND FINANCIAL INFORMATION