Market Conditions: New Fannie Mae Fee for Condo Buyers
Many of you probably saw Mary Umberger’s Chicago Tribune column on Sunday discussing a new fee set to take effect on April 1 for buyers of condos that don’t have at least a 25% downpayment and whose loan is going to be sold to Fannie Mae by their lender.
With many lenders already casting a wary eye on condo loans because of their default rate, Fannie Mae has upped the ante by adding a fee of .75 percent of the loan amount of a 30-year fixed mortgage, for borrowers who put down 25 percent of the purchase price or less, effective April 1.
In simple math, for a condo priced at $300,000, with a mortgage of $240,000 (a 20 percent down payment), if Fannie will be purchasing the loan from your lender, it will assess the buyer an additional $1,800.
Will fees like this cause more buyers to sit on the sidelines?
Fannie Mae’s added fee to crunch condo buyers [Chicago Tribune, Jan 18, 2009]
At the lower end there are a whole bunch of potential buyers that are totally closed out of the market because they can’t come up with a down payment. Over the last few months it has become harder and harder for them to buy as 100% financing options have dried up (yes, they were still available until early January). Consequently, this is going to hit the southern communities really hard.
Of course, being able to buy a condo with 100% financing is not an entitlement and it’s not good for lenders so this is a rational progression.
From the article, a Fannie Mae spokeswoman’s justification:
“These are targeted pricing adjustments aimed at aligning price with risk for the highest-risk products in the market today, including interest-only loans, cash-out refinancings, low credit scores, high loan-to-value loans and condos. Fannie Mae continues to support lenders and provide liquidity to the market,” she wrote.
Does this make any sense?
With even 20% down, a buyer will still pay the full fee.
It seems like the new rule was designed for markets where condos are not a typical primary residence for regular people. I wonder if Freddie and other lenders will follow suit?
I’m genuinely curious as to why condos rather than geographic areas – are defaults occurring only in condos but not other properties in the same areas of the country? I’ve only paid attention to macro issues nationally along with the Chicago market.
Most buyers won’t even know about these fees until closing. So, no, this fee in particular won’t keep buyers on the sidelines. There are a host of other reasons buyers will be kept on the sidelines: unemployment, price, credit…
LOL! Another factor working to increase demand destruction. The mere fact that 100% financing was still available until earlier this month is another reason for me to sit on the sidelines for at least another couple of years.
I’m not getting sucked into any market where there is artificial demand keeping prices inflated. Its surprising to me that no downpayment was still possible given how we all knew how toxic these loans were for at least the last year.
Bob,
Going from 100% financed to 25%-down-or-else is a huge leap, and the ultimate buy high, sell low from the point of view of the mortgage originator. My guess is this rule will be relaxed under Obama.
Chris,
I don’t agree with the fee either. But at least it indicates that Fannie and Freddie are still acting in their own best interests vs. some government mandate. Personally I think it should be called at 20% down which would be far more consistent with the PMI requirements.
If you don’t like this fee then get a loan that isn’t going to be sold to Fannie Mae. Historically, banks kept all the best loans on their own books and sold the rest to Fannie or Freddie.
Oh, that’s right. We’re talking about loans that banks don’t want. We’re talking about loans where all the risk is being shoved off onto the taxpayer. Well boo hoo. Do what your parents used to do. Rent until you can actually afford to buy.
How do we know if the bank is going to keep our loan or not? At what point is that disclosed? I’m looking for a condo that I can actually afford with a 20% down payment. Having to do 25% down would really effect the amount of condo i could buy.
Tipster, why the attitude?
I’m not an expert, but my guess is that most mortgage lenders are just doing what the federal government tells them, and if Fannie unveils a new policy, it’s a good bet that Freddie and the private lenders will eventually have to follow along. By the way, how much mortgage origination is happening outside the GSEs right now? My guess is their market share has exploded — does anyone have the numbers?
Anyway, my point remains that 25% down is a lot, even among the financial-responsibility crowd.
There is a guy on the HBB who three years ago, during the height of the bubble, said that lending standards would revert so far in the other direction that 25% down payments would be the norm. It looks like we’re getting closer to his prediction than I would have ever thought.
we should all applaud this development. this means Fannie won’t be bleeding money as fast. I agree with tipster. I welcome the times when 20-25% downpayments are the min/norm again.
On a $400,000 purchase that’s an extra $20,000+. That’s a lot of money. Better to pay the .75 or at least get the seller to pay it. BTW, will it be tax deductible?
To repeat an earlier question–when in the process will we know?
I’m with Tipster and trader on this one. The faster the risk is priced correctly, the sooner this mess will clear up. Govt meddling in market risk will only bring on greater pain, especially to the non-participants.
Besides, prior to the bubble, condo loans were priced according to conforming/non-conforming standards. Condos with reserves and at least 75% owner-occupancy qualified for conforming loans (up to limits.) All others had to go to the non-conforming market where at least 20% down and full verification were required. There were some exceptions by local lenders (like Hyde Park Bank) in areas with many condos where the lender was familiar with the associations’ balance sheets. Even in those cases, only slight leeway was allowed for the building’s minimum owner-occupancy requirements.
This day was always certain to return. There was no way the external risks of individual condo loans could be ignored for long. Special assessments and nuisances can destroy condo value in a hurry so it is obvious that a lender needs to be wary of these loans in non-bubbly times, toss in the repurcussions of the bubble and one should expect the lending requirements to only get more stringent.
“On a $400,000 purchase that’s an extra $20,000+. That’s a lot of money. Better to pay the .75”
And paying the .75 means you’re paying $2,400 for the privilege of paying interest on that $20k. That’s some expensive money–12% upfront on the $400k example.
If you think you can afford a 400K condo but you can’t afford an extra 20K in down payment, you can’t afford a 400K condo. Anyone who would rather pay a $2400 fee than put 20K more toward their loan balance or buy a less expensive condo is still living in the fantasy world that got us into this mess. Guess what…lots of people live in homes that cost 300K. Some of us live in homes that cost 200K! Would I like a second bath? Sure, but I’d much rather know that I can pay all the bills even if my significant other and/or I lose our jobs.
Stop trying to have in 10 years what took your parents 30 years to earn!
“Stop trying to have in 10 years what took your parents 30 years to earn!”
Your parents moved into their first owned home–a 2/2 condo–in their late 40s/early 50s? Ouch!
Danny:
Whoa. It’s a weekend place. I’m 66 and have owned four previous homes. My wife and I are retired from the Federal government after a combined 57 years. We continue working, and plan to do so for another five years. We have extensive IRAs that we haven’t touched, and a very nice condo in one of the best small cities in the Midwest. We pay our bills before they’re due; give money to charity; and have graduated a child from college. We lived a low key but very pleasant life in the WDC area for 30 years before we moved to the Midwest. We are very nice people, if somewhat boring,
Sorry that I offended you.
Well, Steve, it sounds like you have your stuff together. So why would you be considering paying the .75% feel instead of just putting the extra 5% down? Obviously I mistook you for yet another 25 year old who makes a decent living but can’t hold off a few more years before splurging on some place he/she can’t afford. Sorry.
And when I said people should stop trying to have in 10 years what took their parents 30 years to earn, I was talking about people buying homes within a few years of graduating from college that are as nice or nicer than what their parents or grandparents currently own. Same with cars. Many of my fellow 20-somethings have this notion that they should be able to live like their parents right away without paying their dues and slumming it for a while by living in a small home or driving a Yaris first. The notion of what people can truly afford has gone from whatever you can pay cash for to whatever the bank says you can afford.
Bob when was 100% still available this month? I have seen that you needed a minimum of 5% in most cases, but usually needed more than that. I think that this will definitley affect the market seeing that most people do not have 25% down right now. Most people are struggling to come up with 10%.
Danny,
I don’t think the question will really be why pay .75% instead of 5% extra down. This will more than likely have a much bigger effect on people putting 5% to 10% down. Let’s not get off on a tangent about people buying too much house than what they can afford, we all know that story. Let’s talk about the people who can only put down 5% to 10% on a home they CAN afford. This is really going to slow the system down as it creates one more hurdle for first time home buyers to deal with. Without the first timers, the rest of the market is going to continue to be slow.
First timers have a difficult time getting into the market in the first place because home prices are so high…
See the 3700 N. LSD property
20% of (2009 pricing) $419,000 = $83,800
20% of (2008 pricing) $237,000 = $47,400
but notice that:
10% of $419,000 = $41,900
20% of $237,000 = $47,400
They’re pretty close to each other.
HD means 1999 pricing, not 2008 pricing. Right, HD?
Yes lets talk about them Jason. They never should have been homeowners to begin with and prior to the last decade were never in a position to buy. While you are right many people do not buy more house they can afford with a low downpayment, when you have a low downpayment it removes one of the prerequisites of responsible homeowners: being able to have a budget and save money. When you remove this prerequisite it opens the floodgates to a whole different audience of people: the paycheck to paycheck audience and those not accustomed to setting and living within budgets.
Yes them being removed will really slow down the system, but they shouldn’t have been given access to the system in any case. The volume of the past decade of first time home purchasers was artificially inflated. If a bank wants to still give out a high LTV loan but _keep it on their books_, I am completely okay with that. The key is the bank that originates the riskier loan should be forced to keep it in these scenarios. Would you agree with this proposal? I think if you are originating risky loans then the company should be on the hook for losses and not the taxpayers.
“Let’s talk about the people who can only put down 5% to 10% on a home they CAN afford. This is really going to slow the system down as it creates one more hurdle for first time home buyers to deal with. “
No I mean 2008 pricing 😉
“anon (tfo) on January 20th, 2009 at 5:04 pm
HD means 1999 pricing, not 2008 pricing. Right, HD?”
I couldn’t agree with Bob more. In many industrialized countries, banks require much, much larger downpayments than in the U.S. and many people choose to live at home longer or take other dramatic cost-cutting measures to save up until they can pay cash for their first homes. This whole idea that we should continue to prop up real estate prices in this country via easy credit is ridiculous. If you can’t afford 20% down, you should be renting. If you can’t afford closing costs, you should be renting. If you can’t afford your rent, get a smaller place or get more people to share your space and bills with.
I think you will see all off the above when this is over and done with…..
Okay I again plan to set you all straight. You do not have to out down 25% to purchase a condo. You also do not have to pay the 75 basis points at the closing. Fannie and Freddie are simply lending on a tier based system right now. If you 50% down you get a 25 basis point discount on your rate. If you put down between 50 and 75 basis you receive no change. If you put down less than 25% you get hit with 75 basis points on your rate.
Just so you know 75 basis points equals about .25% in rate. If someone who puts down 25% can get a 5% rate then someone with who puts down 20% would receive a rate of 5.25%.
It is frustrating that a 20% down payment no longer received the very best rate but it is not the end of the world.
Class is out…
The last thing the government needs to be doing is trying to prop up unsustainably high home prices. It won’t work, and will only delay the market recovery.
If you are “struggling” to put down 10% on a “house you can afford” than you really can not afford it and the associated risk that comes with it. So incredibly simple!!!
“If you are “struggling” to put down 10% on a “house you can afford” than you really can not afford it and the associated risk that comes with it. So incredibly simple!!!”
Ze, Lets look at a few things that most first time owners deal with. First, renting doesn’t help your credit score. I have never seen any of the rent that I pay on time to a landlord, show up in a credit report. Second, even if someone doesn’t have 10%, doesn’t mean the can not afford to buy, it simply means that they have not saved the 10%, and that could simply be a function of timing. For some, it might take an extra two years to sock away that 10%, but why should they do that if they have a credit score in the high 700’s? If their credit is that good, then they obviously have a responsible financial aspect to them, right?
Everyone on the board seems to think that ALL 100% financing deals of the past few years are the cause of the housing crash, but I think there is a very large number of people who financed 100% and bought places that are in no danger of being foreclosed, etc.
The major issues where not necessaryly banks loaning out 100% LTV, but more likely because they were giving loans to people with credit scores in the 500’s…
Jason R,
I think people here are redefining “creditworthy” from “paying small bills on time and hence having a good but untested credit score” to “being a diligent saver.” Maybe that’s as it should be.
The FICO scoring process is a poor predictor of likelihood to default on a mortgage. All it really does is show how good or bad someone has been at managing previous bills, which may or may not have included a mortgage or other large expense. There are many foreclosures on people who had good credit at the time the loan was given.
Thank god i’m closing on my new place one week before this date! The last thing I need is more stupid government and mortgage insurance fees. ALready getting bent over on the stupid city of chicago transfer tax of $7.50 per $1k spent, upfront MIP and numerous other things. Now we’re paying for fannie’s idiotic behavior over the last 5 years? Thanks idiots!
Jason R,
Its tough to refute your assertion without data. But its my belief that having the downpayment, while perhaps not as good a predictor as FICO for default, is still a very good predictor.
As it also removes the financial incentive for the buyer to not default should property values decline and they go underwater on their mortgage. (I’ve said repeatedly on here I’d trash my FICO score for a few tens of thousands of dollars). When the person accepting the mortgage loan has no ‘skin in the game’, so to speak, it really warps incentives. Same thing with the bank packaging and reselling the loan.
Hey, I agree with both Jason R and Bob. There are/were plenty of people who are perfectly good credit risks for a home purchase w/o 10% down (I’m one of them); also, having 20% in your house makes it a lot less likely that you will default.
Further, I think that on the other side of the current troubles, we will find that FICO was about as good a predictor of default as S&P/Moody’s/Fitch ratings of CDOs were–that is, total crap, because they were based on a track record of different underwriting practices and easier access to credit and increasing asset values. Even if there were a desire to do so, the models cannot account for things which haven’t yet happened, so there is going to be a long, hard shakeout of all credit rating practices.
100% loans are not the problem. They lose there jobs can’t pay your mortgage its that simple. There is a saying in mortgage and real estate business “don’t pay you don’t stay”
I personally know lots of people that have 100% they are fine; but I also know a lot that lost there homes and they put 10 and 20% down
You can’t continue to export jobs overseas and expect people to make it.
I’m a realestate Broker