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Wednesday, May 30, 2007

FNMA Tightens On Subprime

I know, I know, the popular impression is that Fannie Mae doesn't underwrite subprime but it does. It is a very big player, in fact. Fannies' 0705 announcement is at eFannieMae.

They are tightening credit standards on MyCommunity loans (no more EA-II) and adding a 1% interest rate premium on top of any other feature premiums, among other actions. The 1% goes into effect on August 1st. In 2006, Fannie Mae originations of MyCommunity loans increased to 3 times that of 2005. And year to date 2007, origination of MyCommunity loans is nearly that of all of 2006.

In other words, the credit tightening cycle in not over yet in mortgages.

It really hasn't even begun for corporate credit. It is true that banks are pulling back on corporate and consumer credit (except for credit cards), but they don't control the market.

Other interesting tidbits are that the HUD Area Median Incomes for 2007 are going to be lower in some areas than in 2006....

Mortgage interest rates are moving up significantly now. MBA's latest weekly update gives the average 30 year fixed as 6.32%. I usually use HSH, which gives the national 30 year fixed average as 6.46%. CA, FL, MA, NJ & NY all averaged at or above 6.50% last week. These rates are risk-based to some extent. The difference between the MBA numbers and the HSH numbers is that the MBA numbers assume 20% down, which is not all that common any more.

Housing is acutely sensitive to interest rates, because higher interest rates increase monthly payments and decrease affordability. With higher default risk and higher bond yields, the trend in mortgage rates should be broadly up. It looks to be continuing tough going for home sales.

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