The private mortgage insurance (PMI) payment is one of the most important considerations in a real estate negotiation. Because it can be quite expensive, it always plays a big part in determining the type of loan that a borrower receives. The two major government-sponsored entities (GSEs) Fannie Mae and Freddie Mac have recently issued new eligibility requirements for their programs or PMI payments. Here are the basics of what you need to know about those new requirements.
When did the new requirements take effect?
The new Fannie Mae and Freddie Mac requirements go into full effect after December 31, 2015.
What is the overall purpose of the new Fannie Mae and Freddie Mac requirements?
Overall, the government is trying to make sure that Fannie Mae and Freddie Mac have less of an effect in the housing market. Many requirements were changed specifically to counter the effects of the 2008 housing crisis, and the current changes are attempting to bring more stability to the programs and return them to pre-2008 levels of participation in the market. Federal Housing Finance Agency (FHFA) director Melvin Watt also called the changes essential to helping reduce the risk of Fannie Mae and Freddie Mac in the market.
Higher capital requirements protect the lending institution and the GSEs from borrowers who do not pay on time, general administration expenses, and large scale disasters such as the 2008 housing crisis. There have also been guarantee fee adjustments made in the requirements.
The government will also calculate the capital requirements in a slightly different way, using data that was cultivated by the Federal Reserve in its latest forward-looking Comprehensive Capital Analysis Review reports on unemployment, future interest rates, and real estate prices. There is also a new table of explicit seasoning factors that will apply to all loans that originated in the market after June 2012. Any loan that originated before that mark will continue to be judged by the previous asset reserve allocation tables.
What is a guarantee fee adjustment?
The guarantee fee is a type of payment from the lender to the GSE that protects the GSE against credit related issues on the mortgage. There were many guarantee fees implemented after the 2008 housing crisis that the current private mortgage specifications get rid of.
What are the changes in the guarantee fees in the new eligibility requirements?
PMI lenders will no longer have to pay the 25 point basis adverse market charge that was implemented specifically in response to the 2008 crisis, and certain states that were charged even more starting in December 2013 will now have their guarantee fees reduced back to normal levels. However, there are many new, smaller, and more targeted fees that will be implemented.
What kinds of loans will be subject to what fees in these new requirements?
Loans with a loan to value ratio that is above 80% will see virtually no change in the upfront fees that are charged to the lender, and the same goes for loans to people with credit scores that are below 700. Because there are no new fees added to these low credit loans, riskier borrowers will receive the full benefit of the scrapping of the 25 basis point adverse market charge. The expected result is a more widespread loan structure for people who are in most need of GSE assistance.
However, there will be increased guarantee fees on other high-risk loan types.
These new fees also include a small increase for loans that have multiple layers of risk such as cash out refinances, jumbo conforming loans, or borrowers who need secondary financing. Overall, the average level of the fees that the GSEs will collect is expected to be revenue neutral, and these fee changes are effective on all loans that come to the GSEs from September 1, 2015. The overall change will be between 25 and 37.5 basis points on all of these loans.
What are the new requirements for private mortgage insurers?
The new Fannie Mae and Freddie Mac requirements for private mortgage insurers includes raising capital requirements by a March 1, 2016 deadline that will help to ensure a lower risk for the GSEs. There was some discrepancy between mortgage insurers and the government about the revenue streams that would be counted as capital in the business. For instance, the Radian Group and others wanted to be able to count the nonrefundable portion of some policies that are collected at the close of negotiations. Currently, the terms set forth by the government do not allow PMI companies to count this revenue stream.
PMI firms are now given credit for 210 percent of their yearly premiums for loans that originated before 2009 as assets.
What is the final effect of all of these changes?
Fannie Mae and Freddie Mac are doing their best to reduce their activity in the market while keeping housing affordable to low credit borrowers. The new fees on certain kinds of loans will help to ensure that the programs remain financially viable. Total housing volume for the two GSEs is expected to remain around the same.
2 Point Highlight
The government will also calculate the capital requirements in a slightly different way, using data that was cultivated by the Federal Reserve in its latest forward-looking Comprehensive Capital Analysis Review reports on unemployment, future interest rates, and real estate prices.
PMI lenders will no longer have to pay the 25 point basis adverse market charge that was implemented specifically in response to the 2008 crisis, and certain states that were charged even more starting in December 2013 will now have their guarantee fees reduced back to normal levels.
