Fannie Mae Sets Tougher Standards : Will Make It Harder for 1st-Time Home Buyers to Qualify

The Federal National Mortgage Assn., grappling with record mortgage foreclosures, announced tougher standards Monday for the mortgages that it buys from banks and savings and loans. The changes will mean that some home buyers, especially those looking for the first time, will find it difficult to obtain a home loan, real estate experts said.

David O. Maxwell, chairman and chief executive of the association, known as Fannie Mae, said buyers who put up less than 10% of the purchase price as a down payment on their homes will need more income to get a loan after Oct. 1, when the new guidelines take effect.

Holders of loans who put down less than 10% are five times more likely to default than those who make down payments of 20% or more, he said.

Fannie Mae, the nation’s third-largest corporation, buys mortgages from banks and savings and loans, providing the lenders with money to make additional loans. The company then packages the mortgages and sells securities backed by them on the secondary market.

Loans which do not meet the new requirements on borrowers’ incomes, as well as several types of adjustable-rate mortgages, will no longer be bought by Fannie Mae, Maxwell said. As a result, S&Ls; and other original lenders are likely to enforce the new standards when evaluating loan applications.

As interest rates have dropped in recent months, growth in home values has slowed dramatically and many buyers who made small down payments have not seen the equity in their homes grow. Under these circumstances, such homeowners have little to lose through foreclosures.

The purpose of the tightened rules is to give homeowners “more stake in their property” so they “won’t walk away from their mortgages,” Maxwell said.

At the end of June, a record 1.25% of the loans in Fannie Mae’s $91-billion portfolio were in foreclosure. The company’s loan losses in 1984 were $87.3 million, and they reached $47 million in the first six months of 1985.

No More Than 25% of Incomes

Under Fannie Mae’s new rules, the buyer of a $76,500 home who paid 5% down would need an annual income of $41,232 to qualify for a loan at 12.2% interest. Under the current standards, an income of $36,814 would be needed.

In addition, the monthly mortgage payments of buyers who pay less than 10% down can be no more than 25% of their gross income and no more than 33% of their income when added to other installment debt.

Under existing guidelines, these figures were 28% and 35%, respectively.

In other changes, Fannie Mae will limit to 3% on fixed-rate loans the amount that sellers, builders, real estate agents or any other “interested party” can contribute to the home purchases in which the down payment is less than 10%.

Builders, for example, may pay part of the interest rate for the buyer in order to promote home sales. Such payments would be included in the 3% limit.

No such contributions will be allowed on adjustable-rate mortgages when the down payment is less than 10%.

After Oct. 1, Fannie Mae also will buy only ARMs that have limits on interest-rate increases and will not buy ARMs with graduated-payment provisions--with higher monthly payments in later years.

Other restrictions will be placed on gifts--from relatives or friends, for example--that buyers can apply toward the purchase of their homes. Purchasers will be required to make at least a 5% down payment in addition to any gifts received toward the purchase price.

Industry leaders were unable to estimate immediately how many potential buyers would be excluded from the market by Fannie Mae’s new rules. But John J. Koelemij, president of the National Assn. of Home Builders, said his organization fears that “Fannie Mae may have gone too far. The new guidelines could disqualify thousands of potential buyers from the housing market.”

The actions of Fannie Mae, which buys 10% of all home mortgages sold on the secondary market, have a major impact on the mortgage market. Other lenders are expected to follow Fannie Mae’s lead in underwriting changes, several industry spokesmen said.

“Now there will be a tightening up by portfolio lenders (those who hold the loans they make rather than selling them in the secondary market) to follow Fannie Mae,” said Dallas Bennewitz, director of mortgage lending for the U.S. League of Savings Institutions.