MADISON, Wis. – Record low mortgage rates have buttressed continuing high demand for first mortgages and refinancings from members. They've also boosted the appreciation rate on property values. All this has been good news for credit unions' mortgage portfolios and for consumers looking to sell or refinance their homes, but it's also meant that secondary mortgage agencies such as Freddie Mac and Fannie Mae, faced with rising loan-to-value ratios, are keeping a closer eye on their loan underwriting guidelines. "The mortgage market is very dynamic now, and any risk-taking action in today's mortgage market is based on investors' preferences and whether they view the risk level is rising," said Doug Duncan, chief economist for the Mortgage Bankers Association of America. He explained that investors such as Freddie Mac and Fannie Mae examine markets and study whether home values and prices are in line with their respective markets. As loan-to-value ratios go up, investors typically see this scenario as one in which the borrower has less equity in their home and therefore is a higher risk. Duncan said so far there has not been a "national price bubble," and in fact, home prices are already starting to come down in some areas of the country. (see chart bottom of page 19). Whether or not these price decreases spread to other areas of the country depends on several factors, said Duncan. If the economy were to go into a double digit decline, which he said it's not expected to do, that could be a major concern, he added. With the credit climate being what it has been over the past couple of years, whether refinancing existing mortgages increases a borrower's risk is partly determined by whether they're using the money to pay off existing debt or to take out new obligations. CUNA Mutual Mortgage Senior VP Jim McCourt said rising loan-to-value ratios and the high volume of cash-out refinance activity has driven the secondary mortgage lenders to revisit their underwriting guidelines. Faced with less flexibility to make riskier loans, McCourt said more credit unions will have to consider offering adjustable rate mortgages to members. Freddie Mac spokesman Doug Robinson confirmed the agency "has its eye" on its underwriting guidelines, but it has not as yet tightened credit on A-market loans. However it is looking more closely at A-minus loans-loans to borrowers with 600 or lower credit scores "in general." Robinson said Freddie Mac notified its customers in July of changes to the agency's requirements for Loan Prospector A-minus, other Caution mortgages and all Non-Loan Prospector mortgages, beginning Jan. 2, 2003. The changes were reviewed in Freddie Mac's September 12th Seller/Servicer Guide. Among the items covered in that guide, customers were told that all A-minus mortgages will be subject to a new credit score/loan-to-value postsettlement delivery feea. Customers "will continue to receive creditworthiness representation and warranty relief currently available for Loan Prospector A-minus mortgages" and "caution mortgages that receive Loan Prospector A-minus-eligible evaluation results will not be assessed the CS/LTV postsetttement delivery fee" if they meet certain requirements. In addition, caution mortgages that receive Loan Prospector A-minus eligible evaluation results "can no longer be manually underwritten and delivered to Freddie Mac as Caution (non-A-minus) mortgages – they must be delivered as Loan Prospector A-minus mortgages." Furthermore, "mortgages that are identified as A-minus eligible by Loan Prospector but do not meet all of the requirements in Guide Chapter C33 or E33 are ineligible for sale to Freddie Mac, even as manually underwritten mortgages." Robinson told Credit Union Times that if a customer sells loans to the agency that the customer's underwriter determines to be A-quality loans, but that Freddie Mac identifies as being A-minus, Freddie Mac will either require the customer to repurchase the loan or pay the delivery fee. "Freddie Mac will be the final arbiter," said Robinson. -

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