Mortgage applications have been on the rise lately, as rates for home loans have dropped to historic lows. Now, Fannie Mae would like to further increase the number of people looking for a mortgage refinance. They've loosened guidelines, allowing people with poor credit easier access to a new home loan.

Fannie Mae has decided to ease the standards on a typical mortgage refinance. Citing concerns for the mortgage loan "logjam," the company is looking to stimulate more activity by relaxing some of their refinancing guidelines.

The timing of the announcement is somewhat surprising, considering that the borrowers who Fannie Mae is green-lighting are the people who helped cause the subprime mortgage mess in the first place. But the new loans being granted do seem to be a far cry from the "easy money" adjustable-rate mortgages that led to a rash of foreclosures and a global banking crisis.

Lower scores, easier approvals

The new plan significantly lowers the credit score requirement for people looking for a new home loan equal to 80 percent or less of a property's value. The guidelines mean that homeowners with credit scores below 580 are now eligible for a mortgage refinance.

On paper, this looks like it should lead to a boom in mortgage applications. However, many of the people who have low credit scores are the same folks who tapped all the equity in their properties. They relied on rising home values to rewrite their adjustable-rate mortgages, using the home's appreciation to cover their increasing debt loads. When housing values dropped, these people found themselves in foreclosure. With the new guidelines, they'll need to get private mortgage insurance to reduce the lender's exposure to loan default.

Less documentation, employment still required

The Fannie Mae mortgage refinance modifications also include fewer documentation requirements. Borrowers will now need to provide only a single pay stub. The self-employed will be required to produce only a federal tax return. It should be noted, however, that the relaxed guidelines don't appear to be lax. You'll still need a job with income to qualify for a mortgage.

Easing the lending criteria doesn't include a no-appraisal mortgage refinance. (Rumors concerning the death of the home appraisal appear to have been greatly exaggerated.) Fannie Mae, however, will begin using automated models to check on the home values of a property, and then rely on those values when considering the need for a home appraisal. Only time will tell how this revised system works.

To its credit, Fannie Mae won't apply these new parameters to adjustable-rate mortgages or balloons, which probably account for the bulk of the current toxic mortgages. The new approach may lead to more mortgage applications and home loans.

Big questions remain: Will people be able to afford the new mortgage (especially one with home mortgage insurance)? Will the economy recover so that homeowners will have jobs to help them make those payments? We'll learn these answers in the next few months-for better or for worse.

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Published on April 17, 2009