Loan rules hit 'trailing spouses'

WASHINGTON — Real estate may be showing signs of a turnaround in many local markets, but the nation's largest mortgage players continue to ratchet up their underwriting rules, making home purchases more difficult for some buyers.

Mortgage giant Fannie Mae, for example, recently issued a laundry list of tougher policies that could directly affect thousands of buyers, especially those involved in job-related transfers.

Reversing a long-standing policy, Fannie no longer will permit mortgage applicants to count the income of so-called "trailing spouses" toward the household income needed to qualify for a loan.

A trailing spouse is one who joins his or her spouse or partner in a job-related move but who has yet to obtain employment in the new location.

Say your company offers you a position hundreds of miles from your present home.

Your spouse or partner, who earns a significant portion of the household income, agrees to quit so that you can accept the transfer. Your spouse will need to find employment in the new area but may not have done so when it's time to buy a house.

Traditionally, lenders have been willing to count at least some of the trailing spouse's income in the old location toward the qualifying income needed to finance the new house.

But under Fannie's policy switch, no consideration will be given. If the main breadwinner's income isn't sufficient to handle the mortgage, the loan application will be rejected; only when the trailing spouse has documented income in the new location will it be counted.

Brian Faith, a spokesman for Fannie Mae, said "given the current economic and job-market instability, the company has opted to discontinue consideration of trailing secondary wage-earner income in the interest of safer underwriting, since this income would only be anticipated and undocumented."

Jan Hatfield-Goldman, a vice president for Worldwide ERC, the international trade association representing the employee-relocation industry, said Fannie's decision "makes the current challenging relocation environment even more so.

Some transfers will either have to qualify on the basis of one income" — forcing couples to "buy less house than they wanted" — or "they may be required to rent for an extended period of time until the spouse or couple is re-employed.

If a couple must wait to purchase a new home until the spouse can find a new job, it could well cause some to reconsider" whether they want to make the job shift at all.

Worldwide ERC estimates that about 800,000 households in the U.S. move in a typical year because of job transfers. In the most recent year in which the IRS has reported statistics — for 2006 — more than 1 million taxpayers filed for job transfer-related deductions.

Fannie Mae, a congressionally chartered investment firm, is now being run under a conservatorship arrangement by the federal government, as is its rival investor, Freddie Mac. The two corporations account for an estimated 70 percent-plus of all new mortgage volume.

However, Freddie Mac still counts trailing spouse or co-borrower income for loan applications, but under strict guidelines:

• The amount of the trailing co-borrower income cannot exceed 33 percent of the total qualifying income for the mortgage application.

• That income cannot be from self-employment.

• The trailing spouse must have been continuously employed in the same occupation for at least two years preceding the relocation.

• And the co-borrower must provide a statement of intent to find employment in the new location. The loan officer or lender must also analyze that local employment market and verify that there are adequate opportunities and earnings potential for the co-borrower.

As part of its recent tightening of underwriting rules, Fannie Mae also announced that it plans to discount the values of all borrowers' stock, bond, mutual-fund and retirement-fund holdings that are claimed toward the applicants' financial reserves needed to qualify for a mortgage.

While Fannie previously counted 100 percent of the claimed or documented value of stocks, bonds and mutual funds toward reserves, under its revised policy it will discount them by 30 percent.

For retirement accounts, it will only count 60 percent of the value toward reserves.

To illustrate: If your mutual funds and stocks are worth $100,000 according to your investment manager or broker, Fannie will only credit $70,000 toward reserves — a 30 percent "haircut."

If your retirement account is worth $500,000, Fannie will only give you credit toward reserves of $300,000.

Fannie Mae's spokesman said the changes are necessitated by "market volatility," which "has caused recent major losses on investments and retirement accounts."

Kenneth R. Harney: kenharney@earthlink.net