The next time you think you may have outgrown your home, consider what it would be like living in The Little House.

Barely bigger than a school bus, the 312-square-foot home featured by CTV News occupies land once reserved for a city alleyway. When the alley went unfinished, a contractor decided to buy and build on the lot.

The home is so small that an adult with outstretched arms can touch the opposite walls inside of it.

But, of all things little about The Little House, it’s sale price is not one of them. Well-decorated and recently renovated, the home at 128 Day Avenue recently sold for the U.S.-equivalent of $159,300, or $511 per square foot.

Fannie Mae announced a new risk-based pricing model and additional mortgage delivery fees this week, adding to the cost of buying a home.

Risk-based pricing was first introduced by Fannie Mae this past April. It added new, mandatory loan fees for high-risk borrowers while rewarding a small group of low-risk borrowers with fee credits.

In the updated model, even 720 credit scores with a 20 percent downpayment won’t protect mortgage applicants from the risk-based fees and they can range as high as 2.750 percent, depending on credit scores and downpayment size.

Fannie Mae will continue the practice of rewarding high-downpayment borrowers with fee credits.

Fannie Mae’s second pricing change involves the Adverse Market Delivery Charge and it is not risk-based — it applies to all applicants equally.

First introduced in December 2007, Adverse Market Delivery Charges are mandatory surcharges on all conforming mortgages. The fee was initially a quarter-percent. It’s now doubled to 0.500 percent.

Combining risk-based pricing and delivery fees, mortgage applicants have two choices to pay them:

1. As a one-time fee, paid at closing, payable to the lender
2. As an interest rate increase, payable month-after-month to the lender

The one-time fee is calculated by multiplying to fee amount by the applicant’s loan size and dividing by 100. The interest rate increase is calculated as a general rule, where each 0.500 percent in fees can be substituted for a 0.125 percent increase to a mortgage rate.

The fees become “official” October 1, 2008, but lenders are expected to deploy them much sooner.

For the second consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.

In its press release, the Federal Reserve addresses inflation, saying that it “has been high”, fingering energy and commodity costs as culprits. The Fed does expects inflation to moderate later this year, however.

Regarding recession, the Fed addressed softening labor markets and tightening credit, and said that high energy prices may slow down economic activity in the months ahead.

The key comment, repeated from the June statement, was this:

Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Translated, it reads:

The Federal Reserve expects that its policy changes to-date will help the markets find balance and order.

In other words, the Fed is biased towards a Fed Funds rate pause at its September 16, 2008, meeting barring new developments.

Stock markets are reacting favorably to the FOMC statement, bouncing higher after the 2:15 PM ET release. This movement is pulling money away from mortgage bonds and, as a result, rates are at their worst levels of the day.

Source
Parsing the Fed Statement
The Wall Street Journal Online
August 5, 2008
http://online.wsj.com/internal/mdc/info-fedparse0808.html

The Federal Open Market Committee meets today and is widely expected to hold the Federal Funds Rate at 2.000 percent.

This does not mean that mortgage rates will stay flat, too, however.

The Fed Funds Rate is a different type of interest rate from the ones charged to American homeowners for their mortgages.

The Fed Funds Rate is an interest rate paid for an overnight loan between banks; it’s the shortest-of-short-term loans made to borrowers with exceedingly deep reserves.

By contrast, mortgage loans are borrowed over 30 years and are offered to borrowers of all credit types.

If the direction of the Fed Funds Rate and of mortgage rates were truly related, the chart above wouldn’t show mortgage rates rising throughout the 12 months ending February 2008 while the Fed Funds Rate fell by 2.250 percent.

So, just because the Fed Funds Rate may remain on pause today doesn’t mean that mortgage rates will, too. Mortgage rates are notoriously volatile post-Fed announcements.

Mortgage rate shoppers may be prudent to lock in ahead of Ben Bernanke and Company’s 2:15 P.M. ET press release.

Lock Bumping is a lock-picking technique described as bring so easy “that a 10-year could do it.” It’s why this 3-minute news video from WMC-TV in Memphis is a must-see.

If the video leaves you feeling vulnerable to home burglers, or you’re unsure if your home’s locks are bump-proof, consider calling a locksmith for help. There are a number of solutions including upgrades to your locks, or add-on hardware such as Secure-A-Lock.

According to the video, 90% of American homes can be lock bumped.

Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.

Effective today, the rule book just got a little bit tougher.

According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.

The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.

Second Home Guideline Changes

• Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.
• With 30 percent equity, the PITI reserve can be reduced to 2 months.

Previously, there was no minimum reserve requirement.

Investment Property Guideline Changes

• With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant’s monthly household income.
• Without 30 percent equity, rental income may not be applied to the applicant’s monthly household income and 6 months PITI is required for both properties.

Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.

Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.

This is because more restrictive guidlines lead to two separate, but concurrent, outcomes:

1. The demand for homes reduces because fewer buyers qualify for mortgages
2. The supply of homes increases because fewer sellers can refinance into more affordable home loan

Less demand and more supply places downward pressure on home prices.

Now, remember that mortgage guidelines continuously evolve and what’s accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you’re reading about mortgages online with your loan officer before making any real estate-related decisions.