What Fannie Mae's 2009 Losses May Mean for You

March 02nd, 2010

Fannie Mae, the mortgage giant that holds approximately $3.2 trillion in residential mortgages, declared a loss of $72 billion for 2009. If you are in the market in the next year for a mortgage refinance or new home loan, you may be affected.

In the past several months, Fannie Mae has tightened underwriting guidelines for conventional mortgages. Requiring higher FICO scores for qualifying and creating more pricing tiers based on FICO scores in 2009 shut out many previously qualified mortgage applicants from conventional loans. Fannie Mae moved to strengthen the creditworthiness of its least qualified applicants who can still be approved for a mortgage refinance or new home loan by decreasing its maximum debt-to-income ratios.

Harder Qualifying For Mortgage Refinances and New Home Loans

Fannie Mae’s posted losses of $72 billion mean that the pressure will be on to tighten credit standards even further. As part of the agreement undertaken when Fannie Mae was taken into conservatorship by the government in 2008, these losses are covered by funds advanced by the US Treasury. With US taxpayers already having put $76 billion into Fannie Mae to bail out the government-sponsored entity (GSE), federal regulators and elected officials will want to see changes in credit criteria to limit future losses to taxpayers.

Mortgage Rates to Rise

Mortgage applicants in 2010 are likely to see higher mortgage rates than mortgage applicants in 2009. March 31 is the last day the Federal Reserve will participate in its mortgage purchasing program that, when finished, will total $1.3 trillion in residential mortgages. To take up the void in the market, Fannie Mae will use Treasury funds to purchase mortgage securities backed by conventional mortgages. With an eye on the balance sheet and the recent $72 billion in losses, it is unlikely Fannie Mae will keep mortgage rates at the low levels created by the Fed’s purchase program.

Mortgage Insurance

There have been rumblings in some parts of Washington, most notably the House Financial Services Committee chaired by Rep. Barney Frank (D-MA), to either eliminate Fannie Mae or make it operate more like the Federal Housing Administration (FHA). All FHA loans require mortgage insurance to protect against, or at least off-set, mortgage losses. Moving conventional mortgages closer to FHA mortgages means the possibility of mortgage insurance on all conventional mortgages.

While it seems like just another headline, “Fannie Mae Losses Top $72 Billion” is news that potentially affects hundreds of thousands of Americans looking for mortgage refinances or new home loans in the future. Fannie’s losses could impact mortgage rates, underwriting standards, and possibly added expenses like mortgage insurance.

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