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For homeowners and home buyers in search of "prime" mortgages, a Federal Reserve-led survey confirms what most mortgage applicants have found out the hard way -- getting approved for a home loan is tougher than ever before.

Each quarter, in a survey of its member banks, the Federal Reserve asks senior loan officers whether their respective prime residential mortgage guidelines have tightened over the 3 months prior. 

May's survey showed that half of all banks had tightened.

The report is more State of the Union than news, per se, but it's still worth studying because "prime mortgages" are historically reserved for applicants of "AAA" credit quality.  They have:

1. The highest credit scores
2. The highest income versus debt
3. The highest home equity percentages

As the three legs of the Mortgage Approval Triangle, it's these elements that separate approvals from denials and, over the last 6 quarters, what were once barriers to approval have since morphed into hurdles.  To get the lowest mortgage rates available in today's market, a homeowner should come to the table with a 740 credit score, debt ratios under 45 percent, and a 60% loan-to-value or better

Without these qualifiers, you can still get good rates for a conforming loan, just not as good as the next guy. 

As part of the guideline tightening, there's now something called Loan-Level Pricing Adjustments on most prime loans.  It's a risk-based fee that works a lot like auto insurance -- the higher your risk to the lender, the higher your interest rate.  Low credit scores and high loan-to-values are the equivalent of driving a sportscar.

780 FICO with 50% LTV is a minivan.

This new system of scoring mortgage rates confounds homeowners everywhere whose all-time payment history is 100% perfect and who always borrow responsibily.  They wonder why they can't get access to the lowest mortgage rates available.  I know this because they email me about it.  The answer is tied to FICO and home equity.

And it's not just doctors, lawyers, and athletes asking, either -- it's everybody.

Meanwhile, banks getting tighter on guidelines has impacted "non-prime" borrowers, too, including homeowners with jumbo mortgages.  Because their loan sizes are too big for the "prime" market, these homeowners create additional balance sheet risks for banks that choose lend to them.  It's no surprise, therefore, that barey a quarter of the banks making "non-prime" loosened guidelines from February through April.

And wouldn't you know it -- jumbo mortgage rates are coming down, just fewer people qualify for them. You can  with your specific jumbo eligibility questions anytime.

The guideline news isn't all bleak, however.  Looking at the chart, it's apparent that banks are tightening their guidelines at a slower pace. 

Indeed, even 15 percent of the banks surveyed reported a modest loosening.  Patterns like this can be good for housing for two reasons:

1. More qualified applicants creates a larger home buyer pool
2. Refinancing boosts household cash flow, spurring spending and the economy

It's widely believed that credit tightening depeened the current recession.  A credit loosening, therefore, may help lead us out.  The Fed's survey doesn't show evidence of easing just yet, but later this year, we could see marked improvement.

Hopefully for home buyers and homeowners, when we do see that improvement, may mortgage rates be low enough to exploit it.

The Making Home Affordable program is officially official. Mortgage lenders are now processing applications and paperwork for the help-the-homeowner plan often referred to as "The Obama Plan".

Because Making Home Affordable is a new program, there have been a lot of questions about how it works, who is eligible, and how to apply for a Making Home Affordable refinance.

What follows is a collection of questions and answers from my clients, the press, plus other things I think you should know.

Of primary importance -- first -- are two points:

1. Only Fannie Mae- and Freddie Mac-backed loans are eligible for The Obama Plan
2. Fannie Mae and Freddie Mac use different sets of refinancing rules

Be forewarned. In some respects, Fannie Mae and Freddie Mac are like the National League and the American League -- it's the same game, but with different rules. Or, maybe a NFL / CFL comparison is more apropos.

Either way, homeowners will have a very different experience with the Making Home Affordable refinance program if their home loan is held by Fannie Mae versus Freddie Mac. Therefire, I'm going to keep the questions below general in nature. I'm also available by email to answer whatever personal questions you may have about The Obama Refi Plan and your household eligibility.

How do I know if Fannie Mae or Freddie Mac has my mortgage?

Both Fannie Mae and Freddie Mac have easy-to-use "lookup" webforms on their respective websites. Check out Fannie Mae's lookup form first because Fannie has a larger market share. Plus, you won't have to give your social security number like you do for one at Freddie Mac. As an alternative, use the 800 number on your mortgage statement to find out the same information.

Am I eligible for a Making Home Affordable refinance if I'm behind on my mortgage?

No. You must be current on your mortgage to refinance through the Obama Plan.

What if neither Fannie Mae nor Freddie Mac has a record of my mortgage?

If your mortgage isn't on the books at Fannie or Freddie, your loan is ineligible for the Making Home Affordable refinance program. You may still be eligible for a "regular" refinance to lower rates, however. Check with your loan officer to get a quote or use a competing bid service like .

What do I do now that I know my mortgage is a Fannie Mae or Freddie Mac mortgage?
Find your last mortgage statement and, in big letters, write "Fannie Mae" or "Freddie Mac" -- whichever is backing your home loan. You'll need to remember this information because the Making Home Affordable program follows a different path to closing with Fannie versus Freddie. Next, call your loan officer and tell him that you want to explore your Making Home Affordable options.

What are the minimum requirements to be Making Home Affordable-eligible?
First, your home loan must be current. Second, you'll can't be more than 5% underwater on your home. Officially, this is known as having a 105% loan-to-value.

How do I know if my mortgage exceeds the 105% loan-to-value limit?
Take your the balance of your first mortgage and divide it by the value of your home. This is your loan-to-value. Don't forget that your loan balance at the time of refinance will be higher than just your principal balance. It will include daily accrued interest, too.

I put down 20% when I bought but I've lost a lot of home equity since. Will I have to pay mortgage insurance because of my Making Home Afforable refinance?
No, you won't. If your home loan doesn't require private mortgage insurance as-is, you won't have to start paying it on your new home loan. The logic behind the move was detailed in a letter to mortgage insurance companies saying, in summary, any new mortgage is going to have lower payments and, therefore, be less risk. In other words, there's no more need to insure the new loan than there was the old one.

I pay private mortgage insurance now. Will my mortgage insurance payments go up with a new Making Home Affordable refinance?
No, your private mortgage insurance payments will not increase, based on the same letter referenced above. However, the "transfer" of your mortgage insurance policy requires some extra steps. Remind your lender than you're paying PMI to help the process move more smoothly.

What's the biggest mortgage I can get with a Making Home Affordable refinance?
Obama Plan refinances are limited to the lesser of 105% of the home's value, or the area's conforming loan limits. In most cities, the conforming loan limit is $417,000. However, there are some cities in which conforming loan limits are as high at $729,750. There's an easy-to-read, updated-for-2009 loan limit chart at http://www.esavemortgage.com/loan-limits.

Can I do a cash out refinance with the Making Home Affordable program?
No, only rate-and-term refinances are allowable according to the Making Home Affordable mortgage guidelines.

Can I consolidate mortgages with a Making Home Affordable refinance?
No, you cannot consolidate multiple mortgages with the Making Home Affortable program. It's for first liens only, even if the first and second liens were opened simultaneously, at the time of purchase. All subordinate/junior liens must be resubordinated to the new first mortgage. If you're unclear about what this means, talk to your loan officer.

Can I "roll up" my closing costs into a Making Home Affordable refinance?
Yes, mortgage balances can be increased to cover closing costs in addition to other monies due at closing such as escrow reserves, accrued daily interest, and a small amount of cash to cover the per diems of a mortgage payoff. There is a maximum allowable increase, however, and it varies between Fannie Mae and Freddie Mac. In no case, though, may loan sizes exceed 105% of the home's value, nor may they exceed the local conforming loan limits.

I am unemployed and without income.

Am I eligible for a Making Home Affordable refinance?
No. Income verification is required for all would-be refinancers.

My original mortgage was a stated income loan. How will my income be verified with a Making Home Affordable refinance?
Applicant income is verified in the same manner as with a traditional refinance -- using a combination of W-2s, recent paystubs, federal tax returns and other, underwriter-requested documentation.

What are the interest rates for the Making Home Affordable program?
Mortgage rates based on the price of mortgage bonds, an openly-traded security. Like stock prices, bond prices change all day, every day. The mortgage rates available to Making Home Affordable participants are the same rates offered to every other conforming mortgage applicant. You can receive a near-real-time feed of what's happening in the mortgage markets by http://twitter.com/mortgagereports.

Will my Making Home Affordable refinance require loan-level pricing adjustments?
Yes, Fannie Mae and Freddie Mac apply loan-level pricing adjustments to Making Home Affordable refinances. This may cause your interest rate to increase beyond the "market rate", or your closing costs to rise, or both. Loan-level pricing adjustments are "risk-based" fees based on a person's credit score and his loan-to-value, similar to how auto insurance policies vary between a minivan and a sports car, for example. There are special LLPA charts, specific to Obama Plan refis. Ask your lender about it.

Is there a minimum credit score for the Making Home Affordable refinance program?
No, there is no minimum credit score requirement for Making Home Affordable refis. Lower credit scores may be subject to higher loan-level pricing adjustments, though.

Do I have to refinance my mortgage with my current servicer?
In some, but not all, cases, Making Home Affordable applicants are required to refinance with their existing mortgage servicer. One general recommendation is pursue a Making Home Affordable refinance as you would any refinance until Fannie or Freddie tells you otherwise. This way, you get to work with a person familiar to you as opposed to working with a Call Center employee.

What does the term "DU Refi Plus" mean? I keep reading it and don't understand.
DU Refi Plus is the name Fannie Mae assigned to its Making Home Affordable program. "DU" stands for Desktop Underwriter. It's a software program that simulates mortgage underwriting. "Refi Plus" is a gimmicky-sounding term that could have been anything. The name has been trademarked, however. As an aside, Freddie Mac is using the branded name "Relief Refinance".

I want to remove my spouse from the mortgage paperwork. Can I do this with a Making Home Affordable refinance?
No. The Making Home Affordable mortgage guidelines specifically prohibit removing a signer from the note. To remove a spouse (or co-signed) from the mortgage, a traditional refinance is required.

For how long should I lock my mortgage rate with the Making Home Affordable refinance program?
It's recommended that all Obama Plan refi are locked for 60 days at a minimum. This is because the Making Home Affordable program is new and mortgage lenders are not 100% familiar with its operation. In theory, The Obama Plan is streamlined for simplicity. In practice, however, there's a lot of grey area and that can cause delays. Better to have a rate lock that lasts too long than not long enough.

Now, this was just a starter list of questions; a basic introduction to the Obama Refi plan. It's 22 questions and can't possibly be comprehensive. If you have a specific question about Making Home Affordable, or want to apply for a Making Affordable refinance, email me using the contact information at the top of this page. I lend in all 50 states. Or, apply for your refi the anonymous way: .

Both ways work.

Sources
Fannie Mae Home Affordable Refinance FAQ
March 4, 2009 https://www.efanniemae.com/sf/mha/mharefi/pdf/refinancefaqs.pdf

Freddie Mac Relief Refinance Mortgages
March 12, 2009 http://www.freddiemac.com/sell/factsheets/relief_refi.html

The government published its 2009 Conforming Loan Limit guidance Monday.

Listed by county, the report grants 324 parts of the country a temporary boost beyond the "normal" $417,000 Fannie Mae-bound mortgage loan limits. 

Designated "high-cost", these areas are differentiated by their local median sales price.  Temporary loan limits can range up to $729,750.

The complete "high-cost" area list is available for download.

Increasing conforming loan limits is part of the American Recovery and Reinvestment Act of 2009 and among the many ways that the government is providing economic stimulus. The change to $729,750 is meant to impact the economy two-fold:

1. Stimulate demand for housing with abundant supplies of cheap money.
2. Entice homeowners with existing jumbo and sub-prime mortgages to refinance into government-insured home loans, protecting banks and the private sector.

Considering that conforming mortgage rates are hovering near 5 percent, the change to make more homeowners eligible for Fannie Mae loans is step in the right direction.

However, all is not Peanut Butter Jelly Time.

In writing the law to extend conforming loan limits, Congress acknowledged that territories are rarely a uniform mix of high-cost -- or low-cost -- housing.  To compensate for intra-county discrepencies, therefore, it added specific language to the bill that grants the government power to designate "sub-areas" around the county to be "high-cost", even when their parent counties is specifically excluded.

As an example, sub-area status could apply to neighborhoods like Lincoln Park and Highland Park in Chicago, or Indian Hill in Cincinnati.  In these areas, homes are relatively pricey versus the whole of their respective counties.  And there are neighborhoods like this in every city, of course.

But what Congress didn't add to the stimulus bill was an explicit definition of the term "sub-area".

• Is a sub-area defined by city limits? 
• Is a sub-area defined by zip code?
• Is a sub-area defined by census tract?

It's too bad sub-area was left undefined because that lack of defintion may be one reason why the government official empowered to grant High-Cost Treatment passed on that right, citing "implementation difficulties".  Furthermore, according to the press release, there are "no plans to use [that] discretion".

For now, all of Chicago and Cincinnati remain bound to $417,000.

Regardless, higher loan limits are a major plus for the nation.  With more homeowners qualifying for today's lower-cost conforming mortgages, two big positives emerge for the economy.

The first positive is that more Americans can buy and own their homes via government-backed funding.  This is especially important because, as second mortgage financing grows scarce(r), negating the need for HELOCs or HELOANs means more eligible applicants.  More buyers that can buy add additional buy-side demand for housing and that kind of demand is an essential ingredient in the housing recovery. 

The second positive is that more homeowners can participate in the ongoing Refi Boom.  With access to lower-cost mortgages and the ability to consolidate two liens into one, homeowners formerly relegated to Jumboland can reduce their mortgage rate, their monthly payment, and maybe even switch to a fixed-rate home loan from an ARM.

This, too, is important with respect to the economy because with smaller monthly payments, formerly-Jumbo homeowners can put additional dollars towards saving, spending, and investing.

The new loan limits apply to all mortgages originated in 2009.

Among the most overlooked elements of the recently-passed stimulus package is the reinstatement of 2008's conforming loan limits. 

Up from $625,500 to $729,750, homeowners in high-cost areas have a better chance of accessing today's low mortgage rates and that is good for both housing and the economy.

Areas designated as high-cost, though, are categorized as such for a reason.

Despite the hundred-thousand-dollar increase to conforming loan limits, there are still plenty of American homeowners in high-cost areas whose home loans remain too big for Fannie Mae to insure. Traditionally, we've called these out-sized loans "jumbo mortgages", or "super-jumbo mortgages".

Over the past few years, jumbo mortgages were bought and securitized by investment banks, hedge funds and other financial firms.  This helped keep rates low. 

Today, however, and as anybody shopping for a jumbo loan can attest, the dearth of both private and public investors has made getting an out-sized loan an extremely expensive proposition.  Rates on jumbo mortgages have been downright awful compared to its conforming-mortgage cousin.  Not to mention significantly higher loan fees.

Thankfully, there is a choice -- it's just not one you may have thought of.

See, the terms "jumbo" and "super jumbo" -- these are words used to describe Wall Street-bound loans and if we look beyond Wall Street, we find local banks that are happy to lend to people in need of money.

And different from Big Banks, local banks tend to keep their loans on the books, giving them permission to draw their own mortgage playbook, separate from what a Fannie Mae-bound loan requires.  We call these mortgages "portfolio loans" and if you've never seen one, the guidelines can look a little weird.

• PMI typically not required above 80% loan-to-value
• 100% of funds needed at closing can be gifted from anywhere
• Closing within a LLC or other corporation is permitted

The good news for jumbo mortgage holders, though, is that portfolio lenders are killing what the likes of the Big Banks have to offer. 

For example, I'm currently quoting a $1,500,000, 7-year ARM at 5.125 percent (APR 5.221).  I tried to shop the same product at a few Big Banks -- none would even consider the loan, let alone try to price it.  And, there are plenty of other examples like this, too. 

• $1.5 cash out mortgage with 60 percent equity, primary residence
• $2.0 million mortgage at 65 percent LTV, primary residence
• $3.0 million mortgage at 50 percent LTV, vacation home

On rare occasions are loans like this approvable through the largest of lenders. It often takes a niche lender to get it done. 

Finding niche lenders isn't always easy, but it can be worth the extra effort.  Mortgage rates are often lower, downpayment requirements are often smaller, and the underwriting process is often smoother.  As a mortgage broker, I work with a lot of them.

If you're having trouble finding a bank to service your "large loan", .  I lend in all 50 states and am sure I can help you find one.

Another day, another demand-side stimulus for the housing market.  Huzzah. 

In the sprawling 407-page stimulus bill, nestled in on page 111, Congress authorized a reinstatement of 2008's temporary conforming loan limits.  Effective immediately, home loans in high-cost areas can be insured by Fannie Mae or Freddie Mac up to $729,750.

"High-cost" means exactly what it sounds like.  A high-cost area is one in which homes are relatively expensive versus the rest of the country.  Cities like Arlington, Aspen and Maui come to mind.  Los Angeles and New York, too.

For homeowners in these areas, the standard conforming loan limit of $417,000 doesn't apply.

The definition of "high-cost" doesn't end there, though.  Different from the 2008 implementation in which sale prices across a county were used to identify high cost areas, the 2009 edition gives discretion for "sub-areas".  This is a hugely important piece of the bill -- especially for people in Chicago.

See, the Chicago Metropolitan Statistical Area includes the triangle of Chicago-Naperville-Joliet.  For all of the high-cost homes in Lincoln Park and Lakeview that would pull up the median sales prices of the region, there are low cost homes on the south and west parts of the city to pull it down, rendering all Chicagoland homeowners ineligible for the jumbo-conforming loan limits.

The same goes for Lake County, Illinois.  Because expensive North Shore homes are outnumbered out by inexpensive homes in the rest of the area, towns like Lake Forest and Northbrook were left out from the 2008 plan.

But now, because the government can legally separate Chicago into sub-areas that defy regional trends, thousands of homeowners can be suddenly eligible for low-rate conforming home loans.  This is a big deal because as mortgage rates have fallen, home buyers in Highland Park, Kenilworth, and Gold Coast have been forced into the more expensive world of Jumbo Mortgages. 

In Cincinnati, the same could be said of Indian Hill.

Now that sub-areas are eligible for high-cost treatment, we can expect demand for new homes to rise because -- in relative terms, at least -- home financing will be Sofa King cheap.

The loan limit reinstatement to $729,750 is another positive development for the housing market.  So much of its ills have been tied to falling home prices and this is just one more way for the government to spur demand.  Combine this action with the $8,000 first-time home buyer credit, Fannie Mae's re-uppance to 10 properties per person, and the ongoing foreclosure moratorium and you can practically predict how the Supply and Demand curve is going to shift.

The government hasn't yet defined which sub-areas are high-cost and which are not. To get notice of the list when it's published, and I'll forward it to you when I get it.  You can also follow me on Twitter because I'll be sure to post a link from there, too.

Most people agree -- purging home inventory is paramount to the housing recovery, Fannie Mae just made that recovery a lot more likely.  Effective immediately, Fannie Mae is rescinding its 4-financed-property per person restriction.

If you turn down Pandora and listen closely, you can hear real estate investors in Chicago cheering all the way from Cincinnati.

Read the Fannie Mae official announcement, you get the sense that the nationalized group is getting with the program. This excerpt comes from the lead paragraph:

Fannie Mae is committed to providing financing opportunities for high-credit quality, bona fide investors. Experienced investors play a key role in the housing recovery.

The use of the adjectives "high-credit quality", "bona fide" and "experienced" was a conscious one, by the way.  Fannie Mae is averse to first-time investors and other foreclosure opportunists. Instead, it wants to serve individuals with a history of owning and successfully managing rental property.

To that end, Fannie Mae will now finance the purchases of 1-unit homes for investors with an interest in between 5 and 10 properties provided that all of the following guidelines are met:

• 25 percent downpayment on the investment property
• Minimum credit score of 720
• No mortgage lates within the last 12 months
• No bankruptcies or foreclosures in the last 7 years
• 2 years of tax returns showing rental income from all rental properties
• 6 months of PITI reserves on each of the financed properties

And lastly, to reduce fraud, Fannie Mae will now require all real estate investors to sign a form granting lenders permission to verify supplied tax returns against the official, IRS-filed version.  This document is less commonly known as a 4506-T.

But lest we think this guideline change is Fannie Mae's olive branch to the people, let's remember that our nation's banks are holding record numbers of foreclosed homes on their balance sheets right now while the most likely buyers of those homes have been to-date locked out from financing. 

Real estate investors want to buy REO but Fannie Mae had made it impossible. The guideline change is meant to extend banks and lenders a lifeline first; bringing experienced investors back into the fold is just how it's getting done.

That said, real estate investors are lovin' it.

For the first time since September, investors can go to auction and know that (relatively) cheap financing will be available from the government.  This should speed the reduction of REO inventory nationwide.  In addition, with more investors eligible for financing, expect greater competition for prime foreclosed properties, helping to keep home prices from falling into the abyss.

The rollback gives a secondary benefit to investors, too -- even those not buying additional property. 

See, when the 4-property restriction went into effect, it was a surprise, 11th-hour announcement made on the Friday before Fannie Mae's nationalization.  This date, meanwhile, has come to be known as the Day Before The Refi Boom Started. 

So, on the following Monday, when mortgage rates instantly plunged three-quarters of a percent, homeowners with 5 properties or more found themselves ineligible.

They couldn't refinance their investment homes, they couldn't refinance their vacation homes, and they often couldn't refinance their primary homes, either. While rates fell for nearly every borrower class, experienced real estate investors were locked out. Today, that's no longer the case. "High-credit quality, bona fide" real estate investors are back in the game.

It's good for them, it's good for the banks, and it's good for housing.

Not every bank sells loans to Fannie Mae, however, so if you think the new guidelines will impact your mortgage plans, be sure check with your loan officer first.  If your loan officer can't help, I can.  and we'll get started.

When you're looking for low rates on a 30-year fixed rate mortgage, the cheapest place to find it is usually the conforming mortgage market.

Conforming mortgages are appropriately named; they "conform" to the mortgage underwriting guidelines of Fannie Mae or Freddie Mac.   Mortgages that meet these criteria are later sold and securitized on Wall Street as mortgage-backed bonds.

But no matter how strong a mortgage applicant's approval triangle, conforming loans are still limited by dollar size.  The 2009 conforming loan limits, as released by the government, are:

• 1-unit properties : $417,000
• 2-unit properties : $533,850
• 3-unit properties : $645,300
• 4-unit properties : $801,950

However, maximum conforming loan limits don't apply to all housing markets equally. 

Areas designated by the government as "high-cost" get the benefit of higher loan size limits based on typical home prices throughout the region.  A condo in the San Francisco-Oakland-Fremont area, for example, is conforming up to $625,500.  By comparison, a home in Mason, Ohio is capped at $417,000.

And too bad for residents of Chicago. 

Because its statistical region includes Naperville and Joliet and everything in between, Chicago is not designated as high-cost even though it has Lincoln Park, Lakeview, Gold Coast and Streeterville to pull up the averages.

There are 59 designated high-cost regions in the U.S., most of which are in California.  For everyone else, the 2009 conforming loan limit is $417,000.  Loans in excess of the 2009 conforming loan limits are commonly called "jumbo", or "super jumbo", depending on their size.

Now, as a very important note, remember conforming loan limits are for conforming mortgages only.  I know that's stating the obvious, but people often meld conforming guidelines and FHA guidelines in their head.  To date, 2009 FHA loan limits have not been specifically published, although the government has given guidance on the matter. 

It reads like nonsense.  And the same goes for niche lenders for large loans -- 2009 conforming loan limits do not apply.

"Conforming" is a Fannie Mae convention so if your loan is not destined for sale and securitization on Wall Street, the loan limits don't apply to you.  This is why we keep hammering home the point -- if you've got a jumbo or super-jumbo home loan in the works, think local instead.  The fees are less and the rates are better.

Lookup your area's conforming loan limits on the HUD Web site, or email me for help.

In a move that will stymie thousands of would-be home buyers and homeowners, Fannie Mae announced another round of mortgage guidelines changes last week.

Unlike past revisions in which Fannie Mae tightened debt ratio and credit scoring requirements, however, the newest underwriting updates zero in home equity and home buyer downpayments.

This is consistent with the emerging underwriting philosophy that Collateral is King.

Paraphrasing Jeff Spicoli:

No home equity, no downpayment, no dice.

Effective December 13, 2008, Fannie Mae will enforce the following single-family residence restrictions:

• Primary residence, "cash out" refinances are limited to 85% loan-to-value
• Second home, cash out refinances are limited to 75% loan-to-value
• Investment properties cannot be refinanced without a 25% equity position

Each bullet point represents a 5 percent tightening over the previous guidelines.

Now, to be clear, Fannie Mae isn't the only source for mortgage money.  The others are comprised by the FHA, the VA, and an innumerable amount of portfolio lenders.  To date, these groups have yet to announce similar loan-to-value restrictions.

But, because Fannie Mae (along with Freddie Mac) guarantees almost half of the nation's home loans, it does swing a big stick. Historically, when Fannie Mae gets tight with its money, the other groups tend to follow. 

Starting 60 days from now, qualifying for a conforming mortgage will require more home equity than at any time since 2003.

Now, there are a lot of people sitting around right now, waiting for mortgage rates to fall before buying or refinancing their home. 

I'd offer a more prudent idea: Just get on with it already. 

None of us can predict what where mortgage rates will go.  Recession, inflation, whatever -- it's a big mystery. But, we do know with 100% certainty that guidelines will tighten effective December 13, 2008, and it will prohibit Americans from getting access to mortgages. 

We know this because Fannie Mae published it on its Web site.

If you're buying a home or in need of a refinance, consider moving up your timeline.  If rates fall after-the-fact, you can always try to refinance into something less expensive.  But if guidelines shut you out, there's nothing you can do about in hindsight. 

If you know you need mortgage money now, just take care of it.  Great low rates don't mean a thing if you can't get qualified.  And starting December 13, 2008, the qualifying hurdles are going to be raised.

Conforming mortgages are limited by loan size, based on average housing costs around the country.  Since 1980, as home prices have increased, so have conforming loan limits.

The current conforming loan limit on a single-family home is $417,000.

Earlier this year, as part of the Economic Stimulus Act of 2008, Congress authorized temporary increases to the conforming loan limit in high cost regions, as defined by median home sale price. In Manhattan, for example, where more homes sell for more than a million dollars than sell for less, mortgages as large as $729,750 are considered "conforming". 

Beginning in 2009, however, that loan limits changes.  Effective January 1, conforming mortgages will be capped at $625,500 in high cost areas, and $417,000 everywhere else.

Therefore, homeowners in high cost areas whose mortgaged amounts exceed $625,500 are now operating on a defined timeline.  Switch to a cheaper conforming home loan prior to December 31, 2008, or risk paying the "jumbo premium".

This includes homeowners with:

• Two mortgages -- one for $417,000 and one for "the difference"
• An ARM that was begrudingly accepted because jumbo fixed rates were too high
• An expensive jumbo fixed rate mortgage

In addition, home buyers in the $800,000-900,000 price range may want to move up their closing dates.  Today, at those price levels it takes a 20 percent downpayment to get access to conforming money.  In 2009, it will take 30 percent.

To lookup your area's conforming loan limits, visit the HUD Web site, or email me for help.  The loan limit charts aren't terribly intuitive. 

Shortly after Fannie Mae and Freddie Mac were nationalized, there was a lot of "Mission Accomplished"-like chatter on TV; as if suddenly-low mortgage rates were the answer to a national housing problem. 

Look, low mortgage rates don't matter if you can't qualify for them and, on that front, it's been more like Mission Impossible than Mission Accomplished.  And with mortgage money scarce -- in a bit of irony -- mortgage default rates are rising, causing the dollar spigot to tighten further.

This is how foreclosures happen.  This is what we're seeing in the market today.

No, the answers to the mortgage market riddles are not in the rates but the guidelines. The stick-figure video above explains why.  Originally "filmed" in January 2008, it's a 5-minute piece that clearly and succinctly explains why mortgage rates are irrelevant and guidelines are paramount.

For owners of investment properties, the mortgage market is getting ugly. 

In its last act as a semi-private company, Fannie Mae updated its lending guidelines Friday, this time slapping new restrictions and additional fees on income-producing properties. 

The most impactful change is Fannie Mae's new, 4-property limitation. 

Based on the new rules, second home and investment property applications will be denied in underwriting if the mortgage applicant has, or will have, more than 4 properties financed in total. 

The former guidelines allowed for 10.

However, Fannie Mae has also clarified what it means to "own" a property, creating a loophole for real estate investors. Fannie Mae no longer considers a property "under ownership" if the property is held in the name of a corporation -- even if the borrower is the sole owner of the corporation. 

Real estate investors, therefore, can place their properties into an LLC and not be subject to Fannie Mae's 4-property limit.  Most real estate investors do this already for liability and taxation reasons, but now it's a good idea for mortgage approval reasons, too.

The other change from Fannie Mae does not have a work-around.  It's a set of new, mandatory loan fees, specifically assigned to investment property mortgages.

• Loan-to-value less than 75 percent : 1.75% loan fee
• Loan-to-value 75.01-80.00 percent : 3.00% loan fee
• Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These new charges are separate from, and in addition to, Fannie Mae's already-costly loan-level adjustments.  Add the two together to calculate the total "mortgage fee".

And, lastly, there's the Fannie Mae changes for "Accidental Investors" -- mortgage applicants that couldn't sell their primary residence and, therefore, converted it to a rental.

Fannie Mae's new guidelines restrict owners of converted property from using its rental income on a subsequent mortgage application.  If the converted property's equity is less than 30 percent of the home's value, the entire monthly housing payment must be shown as a monthly income loss.

If the equity exceeds the 30 percent threshold, owners can use 75 percent of the rental income to qualify, and must also show 6 months worth of housing payments in reserves for both the rental property and the upcoming home purchase in order to qualify.

Now, long-term, it's unclear whether the government's Fannie/Freddie takeover will lead to a reversal in the mortgage guideline tightening we've seen this year, but it's sure done a good job in bringing mortgage down.

But as owners of investment properties are finding out, low rates only matter if you can qualify for them.

Lately, Fannie Mae and Freddie Mac have been in the news every day as economists and lawmakers question the future of conforming mortgages.

But among everyday Americans, a more common question is:

"What is a conforming mortgage?"

A conforming mortgage is one that adheres to the mortgage guidelines set forth by mortgage securitizers Fannie Mae and Freddie Mac.

But that's jibberish.

Conforming mortgage are so-called because, literally, they conform to what Fannie and Freddie will allow on a mortgage.

For home buyers and people in want of a mortgage refinance, conforming mortgages are where it's at -- the ultimate combination of low rates and huge product selection.

It's not that banks can't compete with Fannie and Freddie on interest rates for a given home loan -- they can.  It's that local banks lack the capacity to do it on a grand scale.

Consider what happens to conforming mortgages after a closing:

• First, the individual mortgage is combined with thousands of other mortgages to make one giant mortgage blob
• Next, the giant mortgage blob is split back into lots of tiny pieces
• Then, the tiny pieces are sold to Wall Street as mortgage-backed bonds
• And, as a final step, Fannie Mae and Freddie Mac attach a "guarantee of repayment" to each bond sold

It's this last step that makes conforming mortgages so (relatively) inexpensive.  Because the debt is guaranteed, Wall Street doesn't demand as high of a return as it does for, say, jumbo loans or for sub-prime ones.

Conforming mortgages are nearly risk-free to investors and their interest rates reflect that.

The opposite of a conforming mortgage is a portfolio loan, a mortgage offered by a local bank to be held on its own books.  Other mortgage types include FHA, VA and Alt-A.  Because each of these loan types have their own rules and guidelines, the "conforming" rulebook does not apply.

There were two news pieces written on FHA home loans today. 

Separately, they're interesting but uneventful.  Together, they could be a harbinger of tougher times ahead for two groups:

1. Home buyers that use FHA financing
2. American taxpayers that fund the FHA

The first FHA story was front page in the Wall Street Journal.  It shouldn't surprise anyone that FHA loans using downpayment assistance programs default at much faster rates than non-DPA loans.

The second story wasn't so obvious.

Originally run in Bloomberg, Dawn Kopecki writes that Fannie and Freddie are cherry-picking good loans, leaving spoiled fruit for the FHA's balance sheet.

I was a source for this article, quoted about Fannie and Freddie's loan-level pricing adjustments and how it's encouraging American homebuyers with below-average borrowing profiles in weak real estate markets to shack up with the FHA.

You can guess how this story could end for the taxpayer-funded FHA.  Not only should the government group's loan portfolio deteriorate over the next few years, its guidelines will likely tighten and its fees may increase. 

We've seen this happen before.  On video.

So, consider today's FHA stories your fair warning.  If you're planning to use the FHA for your next home loan, the approval process should be much easier for you today than even just a few weeks from now.

This is because -- sooner or later -- the FHA's loan problems are going to become a mainstream political issue and that's when the hammer would fall.  For as little as the lenders like holding the bag on defaulted loans, the taxpayers like it even less.

Fannie Mae's new mortgage guidelines rightfully scrutinize buyers and owners of condominiums.

Since late-2007, mortgage markets have a new emphasis on collateral, or the value of the underlying property, and in a condo building, collateral can be wiped out for reasons beyond the borrower's control:

1. Foreclosure-like sales prices in a similar unit
2. "Special" assessment fees levied by the association
3. Too much supply for similar units, not enough demand

However, just because condos are more "at-risk" than other property types doesn't mean that Fannie Mae should lump all condominium buildings together. 

New construction condos in 2008 pose much less tisk to lenders than those of 2005 and what Fannie Mae is doing is equivalent to swearing off California Zinfandel forever just because 2005 was a crap year.

The 2008 Condo Vintage should produce much different results from the 2005 Condo Vintage, but, unfortunately, mortgage lenders plan to treat them both the same.

Read the rest of this entry »

There's a myth legend in certain circles called the Sports Illustrated Cover Jinx.  It goes like this:

• You're a story worth covering
• Sports Illustrated makes you its cover story
• The jinx begins and you fall from grace

If you're under the age of 30, you probably know this jinx better as the Madden Curse. 

Players featured on the popular video game's cover often suffer through injury- and/or performance-plagued seasons after appearing on the game's packaging.

Regular readers here may be wondering if The Mortgage Reports has its own sort of jinx going. The author is certainly starting to think so.

Let's look back at the last six weeks -- you can decide for yourself.

The first known case of The Jinx started February 22, 2008.

At the time, I was advising clients on the relative benefits of a 5-year, adjustable-rate mortgage versus a 30-year, fixed-rate mortgage. 

The graph I used spoke volumes, clearly illustrating how homeowners could save $250 monthly on the 1 percent spread between the two products.

Within 15 days of posting, though, conforming mortgage rates for the 5-year ARM rose by 1.250% and surpassed the holding-steady rates offered for 30-year fixed products.

The first time something jinx-like happens, you dismiss it to chance.

The next known case of the jinx started February 27, 2008.  That day, we talked about lender-paid mortgage insurance and how it was the clear alternative to traditional PMI for 100% home loans.

Within 15 days of posting, though, 100% home loans were abandoned by every mortgage insurance company in America and, subsequently, 100% home loans are no longer available to American homeowners.  It's not that the banks won't do it, it's that the insurers won't insure it.

The second time something jinx-like happens, you take notice.  But then came the third instance. 

On March 5, 2008, I wrote about the 5 Things That Don't Control Mortgage Rates, noting that the only controller of mortgage rates is the price of mortgage bonds.

I must have angered the Mortgage Gods with those comments because the very next day, Fannie Mae levied brand-new, price adjustments on all conforming loans, proving that mortgage rates come from two places:

1. The price of mortgage bonds
2. The fancy of Fannie Mae

This jinx thing -- it's starting to sound convincing, isn't it?  Well, it continues!

Next, on March 10, 2008, I talked about the 1-year ARM and how it could be an effective mortgage planning tool for soon-to-be homesellers. 

The product is not without risks, of course, but with rates in the 3.500% range, the 1-year ARM was a terrific fit for a huge group of homeowners in this country.

Shortly after we featured it, the secondary market for  1-year ARMs vanished in an instant.  One mortgage lender popped rates on the 1-year ARM from 3.500% to 10.500% overnight. 

That's seven percent in 12 hours. 

Now, to be fair, not every topic we've covered in the last six weeks has faced the black magic.  There are two obvious examples that show that The Jinx doesn't impact all parts of the economy equally.

1. The U.S. dollar (March 3, 2008): The dollar has continued it's record slide, delighting foreign national real estate investors whose U.S.-based homes continue to get cheaper.

2. Crude Oil (March 11, 2008): Crude briefly touched $110 per barrel before settling down a bit, but inflation numbers are thus far unimpacted.  Inflation readings are showing signs of softness.

Exceptions to a jinx don't diminish the jinx's power, however.  It just means that exceptions exist and we have to respect them. 

This is consistent with the Real World; Tiger Woods and Michael Jordan have appeared on 72 Sports Illustrated covers between them.

But whether The Mortgage Reports Jinx is truly a jinx or just a function of fast-changing mortgage markets, it teaches us an important lesson: When a door opens for you today, you must to be ready to step through it. 

Tomorrow, the door may be closed.