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New Relaxed Mortgage Rules Could Spur Over 1 Million Additional Home Loans

MainStreet logo MainStreet 12/1/2014 Hal Bundrick
New Relaxed Mortgage Rules Could Spur Over 1 Million Additional Home Loans © TheStreet New Relaxed Mortgage Rules Could Spur Over 1 Million Additional Home Loans

NEW YORK (MainStreet) — Strict underwriting standards have kept many would-be homeowners from obtaining mortgages, but that may be changing for many of those who have been locked out of the market. Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) who guarantee loans for borrowers with weaker credit, are relaxing some of their standards, potentially opening the doors to homeownership for hundreds of thousands of Americans.

The new guidelines, adopted in October but going into effect today, will speed the loan process and clarify the standards that lenders tapping the guaranteed loan programs must abide by. The Urban Institute, a nonprofit Washington think tank, estimates that the changes could help generate more than one million additional home loans annually.

Read More: Will Housing Really Rebound in 2015? Realtors, Lenders Need to Talk

The Mortgage Bankers Association (MBA), the national association that represents the real estate finance industry, sees the policy changes as a positive move for the housing industry.

“MBA applauds these announcements and thank the GSEs and FHFA for their effort," said David H. Stevens, president and CEO of the Mortgage Bankers Association. "These changes represent a significant step toward substantive rep and warrant reform that will clarify lenders’ obligations and reduce undue underwriting overlays that restrict access to credit."

The American housing market could certainly use some good news. The Pending Home Sales Index, issued by the National Association of Realtors (NAR) and based on contract signings, decreased 1.1% in October but is more than 2% higher than one year ago. Still, the index is reflecting only an average level of contract activity for the sixth month in a row.

"In addition to low interest rates, buyers entering the market this autumn are being lured by the increase in homes for sale and less competition from investors paying in cash," said Lawrence Yun, NAR chief economist in a statement issued with the data. "Demand is holding steady but would be more robust if it weren't for lagging wage growth and tight credit conditions that continue to hamper those individuals looking for relief from rising rents."

The mortgage lending changes which are just being implemented, a provision of the Dodd-Frank law of 2010 that was long-delayed, will allow lenders more flexibility in underwriting loans, in an effort to boost the U.S. housing recovery. Major lenders are also expected to loosen credit-score requirements and limit the impact of one-time credit issues on underwriting decisions. The volume of paperwork required to complete a loan may also be reduced.

--Hal M. Bundrick is a Certified Financial Planner and contributor to MainStreet. Follow him on Twitter: @HalMBundrick

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