Announcement May 16, National Down Payment Policy Replaces Maximum Financing in Declining Markets Policy

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1 Announcement May 16, 2008 Amends these Guides: Selling National Down Payment Policy Replaces Maximum Financing in Declining Markets Policy Introduction With this Announcement, Fannie Mae is introducing a new, national policy on down payment requirements. The new policy allows for mortgage loans that are underwritten with Desktop Underwriter (DU ) to have loan-to-value (LTV) ratios up to 97 percent and LTV ratios up to 95 percent for manually underwritten loans secured by properties located in all geographic locations where Fannie Mae is authorized to do business. By requiring the borrower to have a three or five percent down payment (or minimum equity for refinances), this new national down payment policy reinforces Fannie Mae s goal to support successful home-owning, not just home-buying. Down payments and borrower equity are critical success factors in homeownership. This new policy supersedes the maximum financing policy that applied to mortgages that are secured by properties located in declining markets. Effective Date and Eligibility The new national down payment policy is effective for conventional loan applications taken on or after June 1, 2008 and applies to one-unit, principal residence transactions that currently allow for LTVs in excess of 95 percent. Down payment requirements vary for other occupancy, property, and transaction types. All changes in this Announcement apply to all mortgage loans delivered to or guaranteed by Fannie Mae, including mortgages originated pursuant to any negotiated contract in the lender s Master Agreement. Replacement of Maximum Financing Policy In Announcement 07-22, Maximum Financing in Declining Markets published December 5, 2007, Fannie Mae reinstated a policy that required the lender to reduce the LTV ratio Announcement Page 1

2 and combined LTV (CLTV) ratio by five percentage points when the property is located in a declining market. The new national down payment policy now supersedes the maximum financing policy. Lenders are no longer required to make a downward adjustment to the LTV, CLTV, or home equity CLTV (HCLTV) based on the location of the property. The replacement of this policy applies to all loans delivered to or guaranteed by Fannie Mae, including loans underwritten with DU and manually underwritten loans. The message currently issued by DU that indicates the property is in an area of declining home prices or an area where it is difficult to assess home values will be removed in a future release and should be disregarded as of June 1, Lenders should continue to carefully review appraisals to ensure that the appraiser has appropriately analyzed property value trends and overall market conditions to arrive at the value provided. Refer to Fannie Mae s Property and Appraisal Guidelines in part XI of the Selling Guide. Eligibility Changes for Manually Underwritten Loans In Announcement 08-08, Mortgage Eligibility and Pricing Updates for Desktop Underwriter and Manually Underwritten Loans, dated March 31, 2008, we reduced the maximum LTV ratio for MyCommunityMortgage from 100 percent to 97 percent for borrowers with traditional credit histories. With this Announcement, the following changes now apply to MyCommunityMortgage: The maximum LTV ratio is reduced to 95 percent (inclusive of financed borrowerpurchased mortgage insurance, if applicable) for one- and two-unit purchase and limited cash-out refinance mortgages that are manually underwritten. The maximum CLTV ratio is reduced to 95 percent if the subordinate financing is an institutional second mortgage. Fannie Mae will continue to allow CLTV ratios up to 105 percent if the subordinate lien is a Community Seconds. Attachment 2 to this Announcement reflects the updated LTV and CLTV ratio requirements for manually underwritten MyCommunityMortgage loans. Eligibility Changes for Loans Underwritten with DU Fannie Mae will continue to allow higher LTV and CLTV ratios for loan casefiles underwritten with DU; however, with this Announcement the maximum LTV, CLTV, and HCLTV limits are being modified as follows: For Flexible mortgages and MyCommunityMortgage loans The maximum LTV ratio is reduced to 97 percent. The maximum CLTV ratio is reduced to 97 percent if the subordinate financing is an institutional second mortgage. Fannie Mae will continue to allow CLTVs up to 105 percent if the subordinate lien is a Community Seconds. For any transaction that includes financed borrower-purchased mortgage insurance, the maximum gross LTV, which includes the mortgage insurance premium, is Announcement Page 2

3 reduced to 97 percent. This amends the Selling Guide, Part V, Section Financed Borrower-Purchased Mortgage Insurance. For all other transactions underwritten with DU, the maximum HCLTV ratio is reduced to match the CLTV ratio. DU will be updated in a future release to reflect these updated LTV, CLTV, and HCLTV limits; however, until that time lenders must manually apply the new limits to loan casefiles underwritten with DU beginning with loan applications taken on or after June 1, Note: All other existing requirements for Flexible mortgages and MyCommunityMortgage loans remain unchanged, including the allowable sources of funds for the down payment. Attachment 4 to this Announcement reflects the updated LTV, CLTV, and HCLTV ratio requirements for loan casefiles underwritten with DU. Exclusions from the National Down Payment Policy There are two exclusions from the national down payment policy such that Fannie Mae will continue to allow LTV or CLTV ratios in excess of 95 percent for manually underwritten loans. Government Loans The national down payment policy only applies to conventional mortgages that are delivered to Fannie Mae and it does not apply to government mortgages that are eligible for delivery to Fannie Mae, including mortgage loans that are fully insured by the Federal Housing Administration; or fully guaranteed by Rural Development, the Department of Housing and Urban Development, or the Department of Veterans Affairs. Streamlined Refinances Fannie Mae will continue to allow delivery of certain mortgages that have LTV ratios in excess of 95 percent. The mortgages must be originated in accordance with Option A or Option A Select, which requires that the mortgage be a limited cash-out refinance, fully amortizing, fixed-rate loan, securing a one-unit property that is the borrower s principal residence. Refer to Attachment 3 of this Announcement. Effective Dates Date How Applied Topic June 1, 2008 Application Date Replacement of maximum financing policy Reduced LTV and CLTV requirements for manually underwritten MyCommunityMortgage loans Announcement Page 3

4 Date How Applied Topic Reduced LTV, CLTV, and HCLTV requirements for loans underwritten through DU with manual application of new limits To be Announced October, 2008 Future DU Release Removal of DU message indicating declining home prices or areas difficult to assess value Updated LTV, CLTV, and HCLTV limits in DU Delivery Date Deadline MBS Issue Date: October 1, 2008 Whole Loans: October 31, 2008 Attachments to this Announcement Manually underwritten MyCommunityMortgage loans with LTV or CLTV in excess of 95% Flexible Mortgages and MyCommunityMortgage loans underwritten with DU that have LTV or CLTV in excess of 97% Announcement included four attachments that outline all of the LTV, CLTV, and HCLTV requirements for mortgages that are eligible for delivery to Fannie Mae. The attachments have been updated to incorporate the changes noted in this Announcement. These grids will replace the grids published with Announcement In addition, several other changes were made to create consistency across attachments and clarify the requirements. These additional changes include Attachment 1 A new reference to identify that this Attachment does not apply to jumbo-conforming mortgages Principal residence, one-unit, purchase, interest-only: Minimum Credit Score requirements have been modified from 720 if 90% and 700 if < 90% to 720 if > 90 and 700 if % Attachment 2 MyCommunityMortgage: The CLTV was reduced to reflect the maximum limit for subordinate liens that are institutional seconds. Footnotes were added to address the CLTV limit with Community Seconds. The section pertaining to Texas Section 50(a)(6) has been removed since this transaction is managed through negotiated contracts. Attachment 3 Option A Only and Option B, limited cash-out refinance, principal residence, oneunit: Minimum Credit Score requirements have been modified from 720 if 90% and 700 if < 90% to 720 if > 90 and 700 if % Announcement Page 4

5 Attachment 4 A new reference to identify that this Attachment does not apply to jumbo-conforming mortgages MyCommunityMortgage: Added a reference that special feature code 716 (Expanded Approval ) is not applicable to MyCommunityMortgage loans. All Attachments Removed the footnote requiring a reduction in the LTV ratios if the property is located in a declining market Updated the footnote text to be consistent across attachments ******** Lenders who have questions about Announcement should contact their Customer Account Team for additional information. Michael A. Quinn Senior Vice President Single-Family Risk Officer Announcement Page 5

6 Attachment 1 Standard Eligibility Criteria: Maximum Allowable Loan-to-Value (LTV), Combined LTV (CLTV), and Home Equity CLTV (HCLTV) Ratios and Minimum Credit Scores for FRM, ARM, Balloons, and Mortgage Loans with the Interest-Only (IO) Feature. Note: Excludes MyCommunityMortgage, HomeStyle Renovation, Streamlined Refinance Products, and Jumbo-Conforming Mortgages (Manual Underwriting) Transaction Type Number of Units Maximum LTV/ CLTV 1 /HCLTV Minimum Credit Score 2 Maximum LTV/ CLTV 1 /HCLTV PRINCIPAL RESIDENCES Fully Amortizing With IO Feature Purchase Money Mortgage (PMM) and Limited Cash-Out Refinance (LCOR) Cash-Out Refinance Minimum Credit Score if > 90% 1-unit 660 if > 75% 95%/95%/95% 95%/95%/95% 700 if % No Co-ops 660 if 75% 1-unit PMM = 95%/(N/A)/(N/A) 660 if > 75% Co-op 3 N/A N/A LCOR = 90%/(N/A)/(N/A) 680 if > 75% 700 if > 75% 2-units 95%/95%/95% 680 if 75% 3-4 units 75%/75%/75% %/75%/75% if > 75% 1-2 units 740 if > 75% No Co-ops 700 if 75% 1-unit 660 if > 75% Co-op 3 85%/(N/A)/(N/A) N/A N/A 3-4 units 75%/75%/75% %/75%/75% 700 Announcement Attachment 1 Page 1

7 Attachment 1 SECOND HOMES Fully Amortizing With IO Feature Purchase Money Mortgage and Limited Cash-Out Refinance 1-unit 660 if > 75% 740 if > 75% No Co-ops 680 if 75% 1-unit 660 if > 75% PMM = 90%/(N/A)/(N/A) Co-op 3 N/A N/A LCOR = 75%/(N/A)/(N/A) 620 Cash-Out Refinance 1-unit 85%/85%/85% %/70%/70% 680 INVESTMENT PROPERTIES Fully Amortizing With IO Feature Purchase Money Mortgage and Limited Cash-Out Refinance Cash-Out 1-2 units 680 if > 75% 740 if > 75% 680 if 75% 3-4 units 75%/75%/75% 660 N/A N/A 1-2 units 85%/85%/85% %/70%/70% 680 Refinance 3-4 units 70%/70%/70% 680 N/A N/A Bolded LTV, CLTV, HCLTV and/or Minimum Credit Score indicate an addition or change from previous guidelines 1 The CLTV may be up to 105% only if the mortgage is part of a Community Seconds transaction. 2 Minimum credit score requirements are for mortgage loans underwritten outside of DU and do not apply to mortgage loans underwritten with DU. The minimum credit score must be based on the highest of LTV, CLTV, or HCLTV, as applicable. We will allow accommodations to the credit score based on the underwriter s Comprehensive Risk Assessment (Part X, Chapter 3). Regardless of the documented circumstances or offsetting contributory risk factors, the minimum credit score may not be lower than 580 or 40 points below the minimum required, whichever is higher. See additional information in the Selling Guide for borrowers without credit scores or with credit scores impacted by erroneous data (Part X, Chapter 8). 3 No subordinate financing permitted on cooperative share loans. Announcement Attachment 1 Page 2

8 Attachment 2 Maximum Allowable Loan-to-Value Ratios and Minimum Credit Scores for Special Mortgage Products (Manual Underwriting) Transaction Type MyCommunityMortgage PRINCIPAL RESIDENCE Purchase Money and Limited Cash Out Refinance HomeStyle Renovation Mortgage PRINCIPAL RESIDENCE Purchase Money and Limited Cash-Out Refinance SECOND HOME Purchase Money and Limited Cash-Out Refinance INVESTMENT PROPERTY Purchase Money and Limited Cash-Out Refinance Number of Units Maximum LTV/CLTV 1 /HCLTV Minimum Credit Score units 95%/95% (N/A) units 95%/95%/(N/A) 680 N/A 1-4 units 95%/95%/(N/A) (Non-traditional credit only) 1-2 units 95%/95%/95% unit Co-op 3 90%/(N/A)/(N/A) units 75%/75%/75% unit unit 75%/90%/90% 680 Bolded LTV, CLTV, HCLTV and/or Minimum Credit Score indicate an addition or change from previous guidelines 1 The CLTV may be up to 105% only if the mortgage is part of a Community Seconds transaction. 2 Minimum credit score requirements are for mortgage loans underwritten outside of DU and do not apply to mortgage loans underwritten with DU. The minimum credit score must be based on the highest of LTV, CLTV, or HCLTV, as applicable. We will allow accommodations to the credit score based on the underwriter s Comprehensive Risk Assessment (Part X, Chapter 3). Regardless of the documented circumstances or offsetting contributory risk factors, the minimum credit score may not be lower than 580 or 40 points below the minimum required, whichever is higher. See additional information in the Selling Guide for borrowers without credit scores or with credit scores impacted by erroneous data (Part X, Chapter 8). 3 No subordinate financing permitted on cooperative share loans. Announcement Attachment 2 Page 1

9 Attachment 3 Maximum Allowable Loan-to-Value Ratios and Minimum Credit Score Requirements for Streamlined Refinance Products (Manual Underwriting) Streamlined Refinance Mortgage Option A and Option A Select Fannie Mae to Fannie Mae Transaction and Property Type Number of Units LTV/CLTV/HCLTV Minimum Credit Score 1 Limited Cash-Out Refinance, Fully-Amortizing, FRMs only, without subordinate financing Option A and Option A Select Excludes cooperatives and/or manufactured homes 1-unit 100%/(N/A)/(N/A) Limited Cash-Out Refinance, Fully-Amortizing, FRMs and Arms with an initial fixed period 5 years Option A and Option A Select Includes manufactured homes 1-unit 95%/95%/95% 2-units 95%/95%/95% 3-4 units 75%/75%/75% Cooperatives 2 only 1-unit 90%/(N/A)/(N/A) Second Home Includes manufactured homes 1-unit Second Home Cooperatives 2 only 1-unit 75%/(N/A)/(N/A) Investment Property (Not available for Option A Select) 1-2 units 3-4 units 75%/75%/75% Limited Cash-Out Refinance, IO and ARMs with initial fixed periods < 5 years (excludes cooperatives and manufactured homes) Option A Only 1-unit 95%/95%/95% 2-units 720 if > 90% 700 if % 660 if 75% 700 if > 75% 680 if 75% 3-4 units 75%/75%/75% 680 Second Home 1-unit Investment Property 1-2 units 740 if > 75% 680 if 75% 740 if > 75% 680 if 75% 3-4 units N/A N/A Announcement Attachment 3 Page 1

10 Attachment 3 Cash-Out Refinance Transactions, Fully-Amortizing FRMs and ARMs with initial fixed periods 5 years (excludes cooperatives and manufactured homes) Option A Only 1-2 units 75%/90%/90% 700 if > 75% 3-4 units 75%/75%/75% 680 Second Home All N/A N/A Investment Property All N/A N/A Cash-Out Refinance, IO and ARMs with initial fixed periods< 5 years (excludes cooperatives and manufactured homes) Option A Only 1-2 units 75%/90%/90% 740 if >75% 700 if 75% 3-4 units 75%/75%/75% 700 Second Home All N/A N/A Investment Property All N/A N/A Announcement Attachment 3 Page 2

11 Attachment 3 Streamlined Refinance Mortgage Option B GSE to Fannie Mae Transaction and Property Type Number of Units LTV/CLTV/HCLTV Minimum Credit Score 1 Limited Cash-Out Refinance, Fully Amortizing FRMs and ARMs with initial fixed period 5 years (excludes manufactured homes) 1-2 units 95%/95%/95% 660 if >75% 3-4 units 75%/75%75% 640 Cooperatives 2 only 1-unit 90%/(N/A)/(N/A) 660 if >75% 660 if >75% Second Home 1-unit Second Home Cooperatives 2 only 1-unit 75%/(N/A)/(N/A) 620 Investment Property N/A N/A N/A Limited Cash-Out Refinance, IO and ARMs with initial fixed periods< 5 years (excludes cooperatives and manufactured homes) 1 unit 95%/95%/95% 2 units 720 if > 90% 700 if % 660 if 75% 700 if >75% 680 if 75% 3-4 units 75%/75%/75% 680 Second Home 1 unit 740 if >75% 680 if 75% Investment Property N/A N/A N/A Announcement Attachment 3 Page 3

12 Attachment 3 Cash-Out Refinance Transaction, Fully Amortizing FRMs and ARMs with initial fixed period 5 years (excludes cooperatives and manufactured homes) 700 if > 75% 1-2 units 75%/90%/90% 3-4 units 75%/75%/75% 680 Second Homes All N/A N/A Investment Property All N/A N/A Cash-Out Refinance, IO and ARMs with initial fixed periods< 5 years (excludes cooperatives and manufactured homes) 1-2 units 75%/90%/90% 740 if >75% 700 if 75% 3-4 units 75%/75%/75% 700 Second Homes All N/A N/A Investment Property All N/A N/A Bolded LTV, CLTV, HCLTV and/or Minimum Credit Score indicate an addition or change from previous guidelines 1 The borrower s representative credit score from a merged credit report must be provided at delivery for pricing purposes even when there is no minimum credit score. We will allow accommodations to the credit score based on the underwriter s Comprehensive Risk Assessment (Part X, Chapter 3). The minimum credit score must be based on the highest of LTV, CLTV, or HCLTV, as applicable. Regardless of the documented circumstances or offsetting contributory risk factors, the minimum credit score may not be lower than 580 or 40 points below the minimum credit score, whichever is higher (except for Option A and Option A Select where no minimum credit score is provided, the 580 minimum does not apply). See additional information in the Selling Guide for borrowers without credit scores or with credit scores impacted by erroneous data (Part X, Chapter 8). 2 No subordinate financing permitted on cooperative share loans. Announcement Attachment 3 Page 4

13 Attachment 4 Maximum Allowable Loan-to-Value Ratios and Expanded Approval Eligibility for Desktop Underwriter Note: Excludes Jumbo-Conforming Mortgages Amortization 1 / Loan Purpose / # LTV/CLTV 2 / EA-I 3 Occupancy Property Approve Loan Type Units HCLTV (SFC 716) Restrictions Flexible Mortgages Selling Guide Part VII, Chapter 1, Section 113 Purchase and LCOR Principal 1 Flexible Requirements 97%/97%/(N/A) Standard Selling Guide Products in DU Selling Guide Part VII, Chapter 1, Exhibit 1 Purchase and LCOR Cash-out refinance Principal Second Home Investor Principal Second Home Investor 1 Co-op Purchase = 95%/(N/A)/(N/A) LCOR = 90%/(N/A)/(N/A) %/95%/95% 1 IO 95%/95%/95% 2 IO 3-4 All 80%/80%/80% 1 Co-op Purchase = 90%/(N/A)/(N/A) LCOR = 80%/(N/A)/(N/A) 1 All 95%/95%/95% 1-2 All %/75%/75% 1 Co-op 85%/(N/A)/(N/A) 1-2 All 3-4 All 75%/75%/75% 1 All 1-2 IO 70%/70%/70% %/85%/85% %/70%/70% EA-II 3 (SFC 716) EA-III 3 (SFC 716) Approve, EA-I, EA-II, EA-III Eligible Approve, EA-I, EA-II, EA-III Eligible Refer W Caution/IV Refer W Caution/IV Ineligible Refer W Caution/IV Ineligible Announcement Attachment 4 Page 1

14 Attachment 4 Loan Purpose/ Loan Type Occupancy # Units Amortization 1 / Property Restrictions MyCommunityMortgage (MCM) Selling Guide Part VIII, Chapter 2 Purchase and LCOR Principal LTV/CLTV 2 / HCLTV 1 97%/97%/(N/A) 2 97%/97%/(N/A) %/95%/(N/A) Manufactured Housing 1 Selling Guide Part VII, Chapter 1, Section Principal 1 95%/95%/95% Term 30 years Purchase and LCOR Second 1 Term 30 years Cash Out Principal 1 65%/65%/65% Term 20 years HomeStyle Renovation Mortgages 1 - Selling Guide Part VII, Chapter 1, Section 117 Purchase and LCOR Principal Second Home 1 Co-op Purchase = 95%/(N/A)/(N/A) LCOR = 90%/(N/A)/(N/A %/95%/95% %/80%/80% 1 Co-op Purchase = 90%//(N/A)/(N/A) LCOR = 80%/(N/A)/(N/A) 1 95%/95%/95% Investment 1 80%/80%/80% Approve EA-I 3 (SFC 716) EA-II 3 (SFC 716) Construction 4 (One-time Close) Principal 1-2 No Condo No Co-op 95%/95%/95% Construction Second No Condo 1 Home No Co-op 95%/95%/95% Approve, EA-I, EA-II Eligible Investment 1-2 No Condo No Co-op Bolded LTV, CLTV, HCLTV, footnotes and/or Minimum Credit Score indicate an addition or change from previous guidelines EA-III 3 (SFC 716) Approve, EA-I, EA-II, EA-III Eligible (SFC 716 should not be used for MCM loan deliveries) Approve, EA-I, EA-II, EA-III Eligible Approve, EA-I, EA-II Eligible Refer W Caution/IV Refer W Caution/IV Ineligible Refer W Caution/IV Ineligible EA-III, Refer W Caution/IV Ineligible EA-III, Refer W Caution/IV Ineligible Announcement Attachment 4 Page 2

15 Attachment year amortization terms are not allowed on the following: biweekly, ARMs with the IO feature, HomeStyle Renovation mortgages and Manufactured Housing. 2 The CLTV ratio may be up to 105% only if the mortgage is part of a Community Seconds transaction. 3 The following amortization types/terms are eligible for loans receiving an EA (I, II or III) recommendation: Fully amortizing; Fixed-rate, ARMs (5/1, 7/1 and 10/1); IO (30-year FRM and 5/1 ARM [ARM Plans 3515 & 3516]). 4 Construction refers to the loan purpose entered on the loan application of Construction, which in DU is used for one-time close transactions. Construction transactions are not permitted for units on condominium or cooperative projects and manufactured housing. Loan casefiles submitted as Construction-Permanent are considered two separate closing transactions and are treated as a Standard Selling Guide refinance transaction. Announcement Attachment 4 Page 3