Pay attention to this reform from Fannie Mae

Fannie Mae recently implemented a reform that may cause trouble for home closings across the US.

With so much information and commentary on this topic, I’ll be brief here and provide you with links at the bottom of this post to take you to sites with authoritative content on this if you want to learn more.

And you should want to learn more about Fannie Mae’s Loan Quality Initiative if you’re thinking of buying or selling a home in 2010.  (It may be safe to assume – or hope – that the problems being caused by this new Fannie Mae initiative will be resolved in coming months, so by 2011 this controversy will be over.)

New uncertainties after the loan commitment letter

Fannie Mae is now requiring lenders to re-check the financial qualifications of mortgage loan applicants after the mortgage loan commitment is issued and just before the loan closing.

In essence, Fannie Mae is seeking to improve mortgage loan quality and reduce the chances for mortgage defaults.

This new requirement to re-check borrowers’ qualifications just prior to the closing took effect June 1, 2010 and the complaints were almost instantaneous.

Big change from past practice

Mortgage loans are now suddenly falling through due to this Fannie Mae reform even after the mortgage loan commitment is issued.

This is a sea change from past practice – the mortgage loan commitment in the past was a near-ironclad guarantee that the purchase money mortgage loan would close on time.

Trouble for home sellers

Home sellers now apparently can’t assume that the issuance by the lender of the buyer’s loan commitment means their home sales will actually go to closing as scheduled.

There may now be delays in closings, throwing off moving plans.

Even worse, home sales may be entirely lost at the last minute, imperiling a seller’s ability to buy his next home or start his new job as scheduled.

Buyers need to protect earnest money deposits

Home buyers face extra risks in addition to closing delays and deal fall-throughs.

After all, buyers typically place substantial funds into an earnest money escrow account to back up their home purchase obligations.

These funds may be at risk if the loan can’t close as promised in the lender’s loan commitment paperwork.

Buyers may not want to let their mortgage contingency clauses expire without having some additional language written into the real estate contract (Purchase and Sale Agreement in MA).

Such language would protect earnest money deposits in the event the pre-closing loan qualification re-check finds problems that delay or derail the mortgage loan.

Sites with more information

Please click the links below to learn more about the Loan Quality Initiative:

Massachusetts Real Estate Law Blog

SmartMoney.com

BankRate.com

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Many low-offer buyers seem sincere in their intent. And they are often astonished when the seller refuses to negotiate with them.

If you are considering making a very low offer, please keep in mind that while home prices in Massachusetts are down, conditions in MA are not nearly as bad as they are in heavily damaged markets in Florida, California and Nevada.

The very low home selling prices in other parts of the US you may be hearing about on the national news are not the norm in Massachusetts.

There are other compelling financial and practical reasons why home sellers reject very low offers.

• “Negative Equity”

Where a homeowner is in financial distress and owes more on a property than the home is worth, he may try a short sale.

But with short sales, the mortgage lien holder(s) can veto the sale.  The lenders often will not consent to a sale at a steep discount off the asking price.  

I recently had a short sale listing where one buyer offered 17% off asking while another buyer offered 36% off asking; the lender involved turned both of these buyers down flat.

If you make a heavily discounted offer on a short sale, you might waste weeks waiting to see if the lender will approve the sale, only to be told “no”.

• Bank-owned “REO” listings

When a lender forecloses on a home, the property is placed on the market as a REO (bank owned) listing.

REO lenders have a strong financial incentive to maximize the selling price on homes they own. 

At least in the regional real estate market surrounding Franklin, MA, I have not seen REO lenders willing to sell at steep discounts off asking price. 

The REO listing history shown below is from an actual listing on the MLS and is pretty typical:

When a bank-owned REO property does not sell quickly, the REO lender often will start a series of asking price reductions over time until the house does find a buyer, but that price reduction process can take months. 

The REO price history shown above details how the REO lender listed the home at $237,900 on November 13, 2008.  It took the lender several months to finally reduce the asking price down to $179,900, the price at which the home eventually went under agreement.

Making an offer well below asking on a REO property typically will not work in Massachusetts, at least in more desirable communities!

Practical Reasons Most Sellers Reject Very Low Offers

There are many home sellers in Massachusetts who are not in financial distress. Quite a few of them have substantial equity in their homes.

You’ll very likely find that even home sellers with good equity won’t typically deal with offers substantially below asking price, at least not early in the life of the listing.

Sellers with equity often need to buy another home with the sale proceeds or have other plans for the money. 

Selling at a huge discount off asking price would deny these sellers the cash to consummate their next home purchase or achieve their other goals.

These sellers often lack the desire to negotiate low offers.

So in conclusion, the typical home buyer in Massachusetts should not have the expectation that offers 20%, 30% or more off asking price will be productive.

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FHA loans (administered by the US Department of Housing and Urban Development) are a very popular choice for home buyers because they require only 5% or even 3.5% down!

Here are some of the advantages of FHA loans:

Low Rates

FHA loan rates are comparable to regular mortgage interest rates.

No Need for 20% Down

With FHA loans, you can make as little as a 3% down payment.  So forget about 20% down or PMI payments!  It’s also OK to use help to amass that 3% down payment.  Down payment money can come from a variety of sources including your parents and other family.

Less Rigorous Qualification

The FHA insured mortgage loan carries a lot less risk for mortgage lenders, so they in turn impose relaxed loan qualification standards on borrowers.  This means you’ll have an easier time being approved for an FHA loan.

Credit Blemishes are OK

Because FHA loan qualification standards are lowered, your past credit problems might not be an obstacle to loan approval.

Learn more about FHA loans at the HUD web site – this site has lots of good content on a wide variety if topics applicable to all aspects of home ownership!

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