November 28th, 2009 by Michael Oliver

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As a result of the excessive foreclosure rates Fannie May has been experiencing the company that buys a high percentage of loans from originating lenders said it will require higher standards. The new standards require borrowers with 20% down payments to have a 620 credit score vs. the previous 580. Additionally those buyers will be only allowed to have a debt to income level of 45% for all debts including the new mortgage payment.

A Fannie Mae spokesman told the newspaper that the limits reflect the company’s recent experience.

Loans to people with credit scores below 620 fell seriously behind at a rate approximately nine times higher than other loans purchased in the same period, Fannie Mae spokesman Brian Faith said. Loans taken out by borrowers with lots of debt also suffer higher levels of serious delinquency, he said.

“It’s not enough to help borrowers buy a home — we must also ensure that they can stay in the home over the long term,” Faith said in a statement to The Washington Post.

I think this will absolutely help the real estate market although the side affect is that it will pull down demand as buyers with scores between a 580 and 620 are shut out of buying until their credit scores increase. In the long term this is a great move by Fannie May the reason why the real estate bubble was created was due to over optimistic bankers backed by complex math theories allowing very unstable borrowers to obtain mortgages and then off loading that risk onto the securities market with “low risk” stamped by insurance companies and ratings agencies paid high premiums to mark those securities as such.  As the real estate markets here in Tucson and across the country improve its very important that the homeowner stock improve and potential borrowers be more closely screened and approved to keep the market from getting to volatile as has been the case for the past 10 years as the real estate markets heated up, turned white hot, and then blew up.

The foreclosure situation while it seems to be getting worse is also continuing to cleanse the market and push homes into an ultra affordable range. The affordability should continue to pull new buyers into the market the only other thing needed is household creation to increase. Part of the reason that statistic is lagging is due to the recession keeping larger families and buyers living at home longer. This trend should start to ease however as the recession has passed and will slowly start to show economic growth.