Fannie Mae Tightens Rules for Mortgages

By JAMES R. HAGERTY- The Wall Street Journal - April 2, 2008

Fannie Mae announced a new round of tightening in its standards for home mortgages it buys or guarantees.

The government-sponsored provider of funding for home loans told lenders Monday it will require a minimum credit score of 580 for most loans it buys on an individual basis. Credit scores, which range from 300 to 850, are designed to measure borrowers' likelihood of repaying loans. In the past, Fannie had no minimum score. The company said it will still acquire loans with lower credit scores in certain circumstances.

Among other changes announced to lenders, Fannie also said it will increase the period needed for borrowers to "re-establish" their credit history after a foreclosure to five years from four years. Fannie said it would allow shorter recovery periods for borrowers with "documented extenuating circumstances" that caused the foreclosure.

Separately, Fannie last week told loan servicers -- companies that collect loan payments -- that they can increase their forbearance period on delinquent borrowers to as much as six months from four months to allow more time to seek alternatives to foreclosure. Fannie hopes that move will reduce the number of loans on which it needs to recognize losses, though it may be only delaying the pain in some cases.

In response to growing default-related losses, Fannie and its main rival, Freddie Mac, have tightened their loan standards and added fees for riskier types of loans in a series of steps announced over the past few months. Those moves have raised costs for borrowers and drawn protests from some politicians and home builders.