Fannie Mae has come out with new cash reserve requirements, and I see a conflict. On the one hand, you have the $8000 tax credit for first time home buyers. On the other hand, you have new guidelines released recently by Fannie Mae that is a credit tightening maneuver.
On every transaction that is sold to Fannie Mae, there are a certain number of months of cash reserves required, made up of the sum of a homeowner's principal, interest, taxes, and insurance (PITI). The cash reserve requirements are generally between two months and six months of PITI.
Fannie Mae has not changed the number of months cash reserves required, but they have changed how cash reserves are calculated.
Cash in checking and savings accounts have had no change. Fannie Mae will count 100% of the verified funds in checking and savings accounts as cash reserves.
The value of stocks, bonds, and mutual funds used to be counted at 100% of the verified value. Here is the big change: only 70% of the value will be counted.
The other change they have made is with the calculation of cash reserves held in a retirement account. Fannie Mae used to count 70% of the value in a retirement account - the percentage now being employed is 60%.
Here are some consequences I see with these changes. First, if a homebuyer is short on cash reserves because of the new requirements, he may have to ask for a gift from a family member to close escrow to satisfy the reserve requirements.
Second, the buyer may have to liquidate their investment portfolio for the down payment instead of using savings in order to satisfy the cash reserves requirement. I am going to assume Fannie Mae will count 100% of an investment portfolio's value if it is used for the down payment - I could be wrong, it is too early to tell.
Finally, there is going to be some "messiness" in terms of the value of investments. Is it going to be the value at the time of loan origination, or the value at the time of underwriting? Either way, homeowners and home buyers are going to have to time their transaction with more care because of the stricter cash reserve requirements.
Those are the consequences I see. The other question I have is who is the government really trying to help? It seems to me that they are trying to strengthen credit quality, but if less people can qualify, what does that do to property values? Aren't property values part of credit quality? There is no question that cash reserves are a strong factor in a borrower's ability to pay. However, if you tighten credit requirements, less people can buy, and demand weakens. Is this going to be an unintended consequence?
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Very interesting. Thank you for taking the time to write about this.
Your welcome Ellen
Bill Ladewig