Increasing of Loan Fees Might Tell Adversely on Foreclosure Crisis

February 24th, 2009 | Tags: Foreclosure Crisis

It is not a joke – the mortgage giants Fannie Mae and Freddie Mac are both thinking of hiking fees and toughening credit standards and down payment rules from the first day of April this year. This increase of loan fees might tell adversely on the foreclosure crisis. Lesser people availing of loans will mean lesser number of potential buyers in the market. And unless the glut in the real estate market is cleared the economic slump will not make a turnaround.

Other important lenders have taken a similar stand and increasing fees. This will greatly reduce the impact of the efforts by the Obama government to stimulate the economy.

The new rules of Fannie Mae and Freddie Mac states that even those with satisfactory credit scores will not get favourable rates unless they make a 30% down payment on the loan. To cite an instance – a housing loan applicant with a FICO score of 699 who makes a down payment of 25% will now be hit with 1.5% ‘delivery’ fee under the new set of regulations. Another applicant with a FICO score ranging from 700 to 720 will pay extra 0.75%. Even the golden applicant with 739 FICO points will have to bear with an add-on of a quarter point.

Those planning to purchase condos and cannot pay 25% down payment will be slapped with 0.75% add-on despite having high credit scores.

Those who are purchasing duplexes wherein one unit is occupied by the owner and the other is rented will be slammed with a flat 1% add-on by Fannie Mae even if their FICO is over 800. Moreover they will have to pay 50% down payment.

Those who refinance and take cash as part of the settlement will have to pay extra – to the tune of three points if their credit scores and now and equity stakes modest.

The companies claim that they have to make up for the losses incurred because of thousands of houses going into foreclosure and not getting sold.

Till last September Fannie Mae and Freddie Mac had been semi-private bodies. They are now under federal control and running at a great loss. Brad German speaking on behalf of Freddie said that some categories of loans with credit risks have been the targets of the latest new rules. He said, “We have to manage these risks appropriately”. This meant that loans would have to be priced taking into account the probability of bigger losses.