Fannie expands ARM and renovation lending

Luke Sharrett/Bloomberg

Fannie Mae is broadening the parameters of its financing for adjustable-rate mortgage, renovation, manufactured housing and accessory dwelling units.

Fannie will no longer reject adjustable-rate mortgages in cases where the difference between the initial and fully-indexed rate of the note is greater than 3% if they have seven- or 10-year terms. The move is in line with a broader loosening in credit for ARM products.

Lower initial rates that adjust upward later in a loan's life contributed to risks in the Great Financial Crisis that forced Fannie and its smaller counterpart, Freddie Mac, into conservatorship back in 2008 but there are reasons to make an exception for longer-term loans.

Because ARM performance risk generally is considered lower for seven- and 10-year products, lenders often qualify borrowers with shorter-term loans based on the payment after adjustment but may consider the initial rate instead for mortgages with longer terms.

Renovation, manufactured housing and ADU changes

In addition to expanding ARM eligibility, Fannie also has rebranded and expanded the Homestyle Energy loan. That product will now be called HomeStyle Refresh and can be used in cosmetic or functional renovations, including remediation for disasters, lead, asbestos and mold.

The limit for the as-completed appraised value for HomeStyle Refresh is 15%.

Loan-to-value ratio requirements will be based on either the as-completed appraised value or the purchase price combined with renovation costs, whichever is less, for homebuyer loans. For limited cash-outs, it can only be based on the former.

Renovations must be done within six months of the note's date, and loans will be delivered with recourse until Loan Quality Connect receives documentation proving completion, but repurchases will only occur if the mortgage experiences a serious delinquency of 120-plus days.

Lenders will no longer need special approval but must identify the loan type with special feature code 892.

The government-sponsored enterprise also is expanding its HomeStyle Renovation loans for more ambitious structural upgrades by doing things like removing a $50,000 cap on costs for manufactured homes.

Accessory dwelling unit changes Fannie is making include additional flexibilities for manufactured housing. Lenders also will have more leeway to offer financing on multiunit properties or in cases where there is more than one ADU.

Fannie and Freddie have been held in government conservatorship since the Great Financial Crisis, but the Trump administration has been exploring ways it might be able to change their status.