Yesterday Inman News had (subscription needed) a piece by Lou Barnes regarding this large blip showing on the Radar screen. The blip kept showing July 22, 2007. The Boston Globe picked up Lou’s piece and you can read it here.
New guidelines making it tougher to qualify under interest only mortgage terms begins on July 22nd.
In summary: “any mortgage containing an interest-only feature be underwritten at the highest possible interest rate or subsequent amortizing payment, and that any mortgage containing a negative-amortizing feature be underwritten at the highest possible balance and interest-rate adjustment”
My interpretation of this new Fannie Mae underwriting requirement is that owners who have mortgages with interest rate adjustments coming up soon, had better have incomes rising substantially because it is going to be tougher to refinance (or purchase) with these new guidelines in place. For example, a buyer who obtains an ARM mortgage with a start rate at 7%, but has a cap of 12%, would have to qualify based upon the highest interest rate (12%) or subsequent amortizing payment. Unless some other creative mortgage products come to market to circumvent these new guidelines, as Lou Barnes suggests, it could worsen a difficult market. Why? I suggest it is due to the high number of borrowers who’s only hope in opening the door towards homeownership is via an interest only mortgage product. Further, if it is difficult for any home buyer to qualify, then the domino chain reaction of sales could stall.
My sense is that many borrowers with existing ARM’s will not be able to handle these new guidelines and the fallout speaks for itself. While I tend to side with Lou that this may be overreaching policy, it begs the question, can the market handle these guidelines, and …..now?