Pain for Prime Borrowers: Fannie Mae, Freddie Mac to Hike Fees; or How a Three-Point Difference in Your Credit Score Could Cost You Thousands.

by Alex Stenback on March 17, 2008

Back in November of 2007, Fannie and Freddie (the two GSE’s, or "Agencies" under whose guidelines some 70% of mortgages are underwritten) announced additional fees which would be tacked onto mortgages for borrowers with credit scores below 680 as of March 1st.  We reported on this here.

Since then, credit markets have deteriorated further, so the ‘Agencies’ are hiking these fees, or pricing "hits," across the board. By June 1st (though many lenders will implement these fees well in advance of that date) even borrowers with FICO scores over 700 – once considered rarefied air – will start feeling the pain.  See the chart below from Fannie Mae. See the Announcement from Fannie here [PDF!]

Click to Biggify

The graphic above may be Greek to many of the civilians reading this blog, so lets use the chart to illustrate the impact with a few examples:

Assumptions: You are buying a 250,000 home, with 20% down, so your loan amount will be $200,000, and the prevailing 30 year fixed mortgage rate is 6%.  Goes without saying you can document income and the down payment is yours.

Scenario 1:
Suppose you have a credit score of 721.

Loan Amount:   $200,000
Payment (P&I): $1199.10

Scenario 2:
Now suppose your credit score is a still very good 718 – just three points lower than the previous example. here’s where it gets a little tricky – now you have a choice.

1.  You can either pay an additional .5% of the $200,000 loan amount ($1,000) to obtain a 6% rate.
2.  Or, you can accept a rate that is .125% or so higher, in lieu of the up-front fee.

Loan Amount: $200,000
Payment:        $1199.10 (+ $1,000 up-front)
                      $1215.22  (6.125% rate)

So at the end of the day, those three points in credit score will cost you $1,000 bucks up front, or an additional $16.00/mo (or $1920.00 over the next ten years)

Scenario 3:
Suppose your credit score is 679. Again you have a choice between an up front fee, or a higher rate, but the up front fee is now 1.25%, due to your credit score:

Loan Amount: $200,000
Payment:        $1199.10 (+ $2500 up-front)
                      $1247.74 (6.375%)

As you can see, even what were once considered safe, rock-solid credit scores are starting to feel the pinch of the credit crunch; and though rates seem to be on a (very choppy) downward trajectory for 2008, you’ll need to have a darn good credit score and a healthy down payment to take advantage of them.

This should also be food for thought for those trying to time the real estate market  – in particular the "fringe" borrowers with less than 10% down payment, or those with less than 10% equity who are holding out for "better rates" to refinance.

Though fundamentals suggest property values will  continue to fall, there is no guarantee that cheap money (or any money, for that matter) will be available to finance them.

{ 4 comments… read them below or add one }

Dan Green March 17, 2008 at 3:35 pm

“Biggify” is the new “ginormous”.

Nate March 18, 2008 at 10:34 am

“…there is no guarantee that cheap money (or any money, for that matter) will be available to finance them.”

Lending is getting more expensive, there is no denying that. However, it has to get significantly worse before we should panic. From a financial risk perspective, it may well be worse to own a “cheap” loan on a property that is worth considerably less than the outstanding debt.

If we get to the point where lending seizes up, we will have larger concerns than our inability to purchase homes. The corresponding economic events would leave many people more concerned about their jobs, families, and immediate needs.

Interestingly, home lending doesn’t have to completely cease to kill this market. If mortgage rates rose to somewhere between 10-15% it would have the same effect for the vast majority of buyers. But, adding a point or two of fees upfront is a long way from this type of problem.

However, this will continue to shrink the pool of buyers. As the mortgage market gets more costly and restrictive, fewer buyers will exist. It will be very difficult to work through the existing inventory with lending costs rising. A year or two from now, many sellers may look back fondly on 2007-2008 prices. People were still valuing Bear Stearns stock at $30 last Friday, why would the housing market be any smarter?

Minnesota Investment Property March 20, 2008 at 11:48 pm

Outstanding article. They should teach this in economics 101 and then show it to you each time you are late on a credit card payment!

Phyllis Harb May 22, 2008 at 9:27 pm

I think it makes “sense” for pricing to be reflective of risk.

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