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For Sale by Owner Articles • - Mortgages and Financing

Fannie Mae to Debut "True Cost Calculator" in May

By Lew Sichelman
A mortgage calculator that allows home buyers to compute the full and complete cost of financing will be available to consumers in early April.
The "True Cost Calculator" is part of a proposal by Fannie Mae, the big federally-chartered financial institution which brings money to housing finance, to create a mortgage consumer's bill of rights that also includes the right to know what is behind the lender's decision to reject a loan applicant.
"Consumers have a right to be treated well," Fannie Mae President Frank Raines said last week at the National Association of Home Builders convention in Dallas.
The bill of rights would cover five basic planks: The rights to access mortgage credit, to the lowest-cost loan for which the consumer qualifies, to know the true cost of the mortgage, to be free of regulatory burden and to know what is behind a lender's decision. But it is the rights to know a loan's cost and to know why a borrower is being turned away that are the most revolutionary aspects of the proposal.
"The true cost of a mortgage is still one of life's greatest mysteries," Raines said. "But it shouldn't be."
To solve this problem, the government sponsored enterprise will add a feature to its site on the Internet that will allow consumers to calculate the true cost of the various mortgage options on the market, and choose the best or lowest-cost loan that meets their particular needs.
Unlike other web-based calculators, which are notoriously inaccurate, Fannie Mae's will cover practically everything from points to mortgage insurance to courier fees. "Right now, there's no mechanism to capture all the costs a consumer has to pay so they can really see what these charges really cost," Raines said. "With our calculator, they'll be able to compare total cost to total cost, mortgage to mortgage."
The Fannie Mae chairman also expects the calculator to help do away with so-called junk fees some lenders pile on borrowers to increase their bottom lines. But there still would be no guarantee that lenders will not add or change their fees at closing. To protect against that, consumers will need to remain ever vigilant.
Initially, the calculator will be available at But the Fannie Mae chairman says it will be made available to anyone, including home builders, who want to give the tool to consumers.
The right to know about mortgage decisions should go a long way toward answering critics of automated underwriting who maintain that it can be used to reject minority borrowers and have been clamoring to know what criteria is used in deciding an applicant is "referred with caution" to a human underwriter.
But it doesn't respond to requests by the Department of Housing and Urban Development for the inner workings of how Fannie Mae and Freddie Mac's underwriting software makes their decisions.
Although the actual algorithms and weighting of the various factors are tightly guarded secrets Fannie Mae and other vendors of automated underwriting say are proprietary, Fannie Mae has said it is willing to share those details with its regulator -- but only after it is satisfied that the information will be kept strictly confidential.
For the proposed mortgage consumer's bill of rights, Fannie Mae believes borrowers don't need to know how a decision is reached, only what goes into the determination. And for that, Raines said his company is "an open book."
The three most important factors are equity, or how much money the buyer is investing; credit history, or how the borrower has handled his finances in the past, and liquid reserves, or how much of a financial cushion does the borrow have.
Other factors that are considered by the program include debt-to-income ratios; salaried vs. self-employed; loan amortization period; adjustable or balloon mortgage; number of units; co-op, condo or attached; funds from other parties; loan purpose; number of borrowers; prior bankruptcies and foreclosures, and prior mortgage delinquencies.
Each of the 14 factors has been shown to be highly predictive of defaults, Raines stressed. "In fact, they are common sense and pretty much standard throughout the mortgage industry."
To help consumers figure out what's wrong with their application and how they can fix it, Fannie Mae plans to provide a new version of its software that will give lenders specific feedback on the more challenging loans.
"We'll provide lenders with the factors that went into the decision, which ones were a problem, and why they were a problem," Raines said. "Then the lender can sit down with the borrower and explain the problem, and discuss some solutions.
"Consumers don't want to know what statistical modeling technique we used or even what the 14 factors are. That's only meaningful to those interested in regression analysis. If they are not approved, all they want to know is why not so they can work on it and turn it around."

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