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Fannie Tightens IO Guidelines

Fannie Tightens IO Guidelines

Fully indexed/amortized payment qualified

December 29, 2006


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Fannie Mae will require interest-only borrowers to be qualified using a fully amortizing and fully indexed payment amount.

The secondary lender announced it will treat “interest-only” as a feature rather than a product.

Fannie explained that it introduced InterestFirst, one of the first IO products in the market, in 2001 but because many variations of IO products have become widely available since then, it is enhancing IO offerings to further expand eligibility criteria and increase efficiencies for lenders. Consistent with the change to treat IO as a feature, use of the InterestFirst name and related product designation will be retired Jan. 30, 2007.

Amongst the changes, the secondary lender will be “requiring borrowers to be qualified at a fully-indexed rate that assumes a fully-amortizing repayment schedule,” it will expand the products, occupancy and property types eligible for an IO feature, and permit lenders to underwrite most products with an IO feature outside of Desktop Underwriter.

“Mortgage loans originated with an IO feature have unique characteristics that warrant additional review and consideration by the lender,” Fannie said, noting that a borrower’s equity can be significantly impacted and the borrower may experience payment shock at the end of the IO term when monthly payments become fully-amortizing payments of principal and interest.

Because of these characteristics, the Washington, D.C.-based company will limit IO features to mortgage loans with terms of at least 30 years and, in the case of ARMs, to those with fixed-rate periods of three years or more. Additionally, certain mortgage loans with additional risk factors will have to be submitted through DU and are ineligible for manual underwriting, according to the announcement.

New fixed-rate IO structures reportedly eligible for purchase by Fannie are 40-year fixed-rate mortgages with 5-, 10-, and 15-year IO periods, 35-year mortgages with a 5-year IO period, and 30-year loans with a 5-year IO period.

Other changes include permitting temporary buydowns for fixed-rate mortgages with an IO feature, with the exception of MyCommunity Mortgages, on primary residences or second homes if the rate reduction does not exceed three percentage points and the rate increase will not exceed one percentage point per year, Fannie said.

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