Fannie Mae is tightening underwriting standards, increasing fees, and will stop buying newly originated alt-A loans by the end of the year, the company said in announcing a $2.3 billion quarterly loss.
The nation’s biggest financer of mortgages also said it’s opening new offices to sell real estate-owned properties in hard hit areas like California and Florida, and is bringing on new employees in loss mitigation to engage in more workouts with troubled borrowers.
Earlier this week, Fannie said it is doubling an "adverse market delivery charge" on all loans to 0.5 percent beginning Oct. 1. The charge now amounts to $1,000 on a $200,000 mortgage.
At the same time, Fannie Mae said it is changing its loan-level price adjustments (LLPA) and will require most borrowers making down payments just large enough to avoid mortgage insurance to pay higher fees.
Under the new LLPA structure, it will actually cost borrowers with credit scores above 620 less to take out mortgages with loan-to-value (LTV) ratios above 85 percent. Those savings would be offset by the need to purchase private mortgage insurance, which is typically required on loans with LTVs above 80 percent.
Conversely, borrowers making taking out loans with LTVs of 75 to 80 percent will pay higher fees. A borrower with a credit score between 640 and 659, for example, would pay an LLPA fee of 2.25 percent ($5,000 on a $200,000 mortgage) when putting down a down payment of 20 percent to 25 percent. The same borrower would pay a 1.5 percent LLPA fee when providing a down payment of 15 percent or less, or $3,000.
Increases in the cost of borrowing — whether through higher interest rates or fees charged on loans — can put downward pressure on home prices because they reduce the buying power of borrowers.
Fannie Mae estimates average home prices are down 8 percent nationwide since the downturn began in second-quarter 2006, and that the "peak to trough" decline will be between 15-19 percent. The company’s analysts see the trend moving toward the high end of that range, driven by bigger declines in some hard hit regions.
Although Fannie Mae has been concentrating on lending money to borrowers with higher FICO scores and reducing the proportion of higher-risk, interest-only loans, it’s seen the average LTV value of the loans in its $3 trillion credit book of business climb from 61 percent at the end of 2007 to 65 percent as of June 30. The increase was largely due to the national decline in home prices, the company said in a regulatory filing.
Tightened underwriting standards, including those incorporated into the most recent release of DesktopUnderwriter, Fannie Mae’s automated underwriting system, have helped the company slash by 80 percent purchases and guarantees of mortgages the company says account for most of its losses, including alt-A loans.
Alt-A loans — popular with investors during the boom because they were often made with little or no documentation — represent 11 percent of the loans Fannie guarantees but accounted for 49 percent of credit losses in the second quarter.
After "considered analysis," Fannie Mae said, it will stop purchasing and guaranteeing newly originated alt-A loans by the end of the year. It’s also ramping up reviews of defaulted loans, particularly alt-A mortgages, for evidence of fraud or improper lending practices. Fannie plans to boost post-foreclosure loan reviews from 900 a month in January to 4,000 a month by the end of the year, and is on track to double anti-fraud investigations this year.
Fannie is guaranteeing payments to investors on $310.5 billion in mortgage-backed securities backed by alt-A loans, and $20 billion in securities backed by subprime loans. In addition, Fannie owns as investments $104.9 billion of private-label mortgage-related securities backed by Alt-A, subprime, multifamily, manufactured housing and other loans.
Fannie Mae grew its investments in mortgage-backed securities by 2 percent in the first six months of the year, to $737.5 billion. During the quarter, Fannie Mae’s credit book of business — the dollar value of mortgage-backed securities that Fannie is guaranteeing payments to investors — grew by 2 percent, to $3 trillion. The company’s market share of new single-family mortgage-related securities issued declined from 50.1 percent during the first quarter to 45.4 percent.
Fannie Mae’s mounting losses — provisions for credit losses and foreclosed property expenses rose to $5.3 billion during the second quarter, up from $3.2 billion in the previous quarter — could restrict its ability to purchase and guarantee loans if it can’t raise more capital.
After raising $7.4 million in May, the company’s core capital of $47 billion at the end of June exceeded the regulatory minimum requirement by $9.4 billion. While Fannie Mae says it expects to be able to maintain the regulatory minimum for the rest of the year, volatile market conditions make it harder to predict what will happen next year.
"We currently have internally prepared scenarios, derived from our own statistical models and management’s judgment, that indicate that we will remain above our regulatory capital requirement through 2009, and others that show that we may not," the company said in a press release.
A sweeping housing bill passed by Congress and signed into law by President Bush last month would give Fannie Mae and Freddie Mac the ability to borrow from the government. But it also gives its new regulator, the Federal Housing Finance Authority, greater leeway to set tighter capital requirements.
A new risk-based capital stress test that will be applied in the third quarter of 2008 will boost minimum capital requirements, Fannie Mae said. If the new requirements had been in place at the end of March, the company’s $24.6 billion capital surplus would have been $17.3 billion instead.
Fannie Mae said a "substantial expansion" of loss mitigation activities and personnel has increased its workout rate from 50 percent of problem loans in 2007 to 56 percent in the first half of 2008. The company has set a goal of achieving a workout ratio of 60 percent by the end of the year.
But Fannie Mae has also seen its inventory of real estate-owned properties balloon as foreclosure rates grow. The single-family foreclosure rate — the total number of homes acquired through foreclosure as a percentage of the total number of loans — nearly doubled from a year ago, to 0.24 percent.
In the first half of the year, Fannie acquired 44,071 single-family and multifamily homes, a 75 percent increase from the same period last year. Sales of REO properties lagged, rising 17 percent to 23,627. Fannie Mae ended the quarter with an inventory of 54,173 homes valued at $5.8 billion, roughly double the total at the same time last year.
In response, Fannie Mae is opening REO inventory management offices in the hardest hit regions, such as California and Florida, and increasing local resources devoted to property management and sales. The company said it’s expanded the network of firms it contracts with to assist in property disposition, "to ensure we have adequate capacity to sell the additional properties we expect to acquire through foreclosure."
Fannie Mae said it is also evaluating proposals the company has received from third parties who want to buy properties in bulk.
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