Mortgage News: Real Estate Lenders Declining Market Value Guidelines Affecting Thousands

Thursday, January 31, 2008

Real Estate Lenders Declining Market Value Guidelines Affecting Thousands

Back on December 5, 2007 Fannie Mae quietly released mortgage-underwriting guidelines that would affect thousands of homebuyers and owners and further test the current real estate market. Now the full impact of this change will be felt almost immediately.

The guidelines updates the maximum loan to values (LTV - here is a LTV calculator) that Fannie Mae will purchase from mortgage lenders whom are selling loans to the GSE (which is just about everyone currently since the Wall Street MBS fiasco)

In summary, all maximum loan amounts are cut by 5% across the board if your property is in a “Declining Property Value Area” as deemed by the following:

A) Automated underwriting systems from Fannie Mae and Freddie Mace return a declining property value notice

B) Property falls into MSA, CBSA or Zip code considered a declining according to the written guidelines from PMI companies.

C) Real estate appraiser notes property as located in a declining market.

Some individuals where already affected via the Fannie Mae automated underwriting system which had its own set of areas built in but now, many more will be since the major PMI companies are enforcing their own guidelines.

Following are some of the notices and start dates from the major PMI companies:

AIG United Guarantee – 5% per automated underwriting system – Jan. 5

MGIC – all properties in California & Florida – Jan. 14

Radian – Download the attached 200 page PDF for areas – Feb. 1

RMIC – as per Automated Underwriting - Jan. 28

So a buyer who saved up his $15,000 to equal the 5% down payment requirement of $300,000 will now need $30,000 to purchase if he wants the same mortgage financing to purchase the home.

Additionally the cost of PMI coverage itself is going up in most of the areas further pushing up the total monthly payments for buyers.

Since the business has been slow and many real estate agents and mortgage lenders have not had any transactions they are going to be caught off guard by this update, leading to many recent pending transactions being cancelled.

So what is a homebuyer supposed to do?

The current options for home buyers is to now use government loan programs such the FHA home loans which requires down payments as little as 3% or for veterans the VA home loan program which allows for 100% financing.

There are other available options but all are more expensive. For example buyers may qualify for the conforming 100% financing options which carry a significantly higher interest rate and PMI rate and be required to put down only 5%.

As a result of these changes, I believe that property value declines maybe further accelerated in these areas and you will see the NAR’s Pending Home Sales Index drop dramatically over the next few months directly due to these changes.

Those homeowners who have been thinking about refinancing should seriously consider doing so now as not only will are they affected by actual property value dropping but now also the decrease in maximum loan to value amounts.

Have any of you reading this had this experience yet? What do you think the impact will be in these areas?

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Anonymous Anonymous said...

Thank you for providing links to the actual UW companies - this adds validity when attempting to let loan officers know what we're up against.

9:52 AM  
Blogger Jason said...

This is a little reminiscent of the account "death spiral". Property values were dropping -- because they dropped it became riskier for investors and the banks no longer issue as many mortgages -- which then causes less demand and further drops home prices -- which then increases investor risk and they no longer issue 95% mortgages and only offer 90% LTV -- which then causes even less demand and further drops in home prices --

IT WILL NEVER END!!! Unless...the feds step in and do something like allowing folks to take out money from IRAs tax-free is used for a home purchase, even if it isn't a first time purchase.

12:30 PM  
Blogger Jessie B said...

Hello Jason,

I don't agree that it won't ever end. The bottom will when property values reach prices where traditional real estate investing makes sense again... meaning buying a home, mortgage payment is $1,300 - renting a home in same neighborhood also $1,300.

Reason is this will bring back the traditional real estate investors and case the market to level out, lenders will start lending again. Then consumers start thinking... "well I'm already paying 1,300 might as well buy".

Once that happens the RE market will pickup.

1:32 PM  
Anonymous Anonymous said...

It may take a while for the rent to reach the level of the loan payments. In the mean time, our available cash declines both in value and consumption, as costs continue to rise. Therefore, the little savings the typical, unprepared citizen has the assets get consumed. What then.... Any suggestions?

1:30 PM  
Anonymous Anonymous said...

Have kept accurate records, but won't bore you with our 7+ month financing spiral to buy a Florida KB home using Countrywide, bust, Fifth Third, Bust, now Bank of America, Just told we need $8500 more down.
We are too old for this, Not like the younger buyer, our income is quite static. Just trying not to lose our $15,000 down. Had we only known!!!!!

3:32 PM  
Anonymous Anonymous said...

Just got caught in this bind ourselves. We saved 5% and were told by the bank that we could finance 95% using a traditional 30-fixed rate.

Midway through our appraisal cited a declining market and we were denied our loan.

By the by, Harris Bank was the "switch and bait" bank.

5:14 PM  
Anonymous Chase Mortgage Consultant said...

In regards to the guy bashing Harris Bank...

You are clueless. These guidelines are rolled out by Fannie Mae and Freddie Mac, not the bank. Believe me, the bank would love to write your loan but they can't.

12:59 PM  
Anonymous Anonymous said...

Trying to get a No Fee Mortgage Plus loan from Bank of America. For months, we thought we were only required 5% down, which equals $6,00. Thought we would throw an extra $2,000 on top of that since we had the extra cash. Now, less than 2 weeks prior to closing, we are told the property is in an area with declining values (Yeah, tell that to the home sellers-HA HA!). So now, I only have a few days to come up with the extra money, plus provide documentation of how I got that extra money. I wish I had known about this from the beginning and was more prepared.

7:30 PM  
Anonymous Chris said...

On May 16, 2008 Fannie Mae Announced Single National Down Payment Policy that
Replaces Policy Regarding Markets Where Home Prices are Declining. The new national down payment requirements of 3 or 5 percent will apply to loans for purchase of single-family, primary residences.

10:51 PM  
Anonymous Anonymous said...

I read the bait and switch comment. As an appraiser..I am being pressured to NOT check the declining market box on my reports for obvious reasons. The brokers wish to make their commission...the banks want to lend...the appraisers want to appraise...the agents wish to sell houses. The appraisal is a document based on history; in other words all my supportive data is based on actual sales...transactions that have recently occurred. If there is no data to suggest a stable or increasing market price...or which shows clear excess inventory and resale prices declining....the DECLING box gets checked. It is not the appraisers fault...nor the banks fault. Is it the lenders fault for being squeamish about lending in this environment?? I think not. I agree with Jason's pessimistic outlook (unfortunately). This is a vicious circle we are in...and some type of stimulus (for lack of a better word) is needed to break the cycle.

9:49 PM  
Blogger jose said...

I just found out about this today. We're relocating to SE Washington for work and our lender told me we have to come up with 10% vs. 5% down on a new purchase. Didn't hear anything about this Declining values list a month ago when we applied. Good thing we haven't signed a purchase agreement yet.

These declining market value guidelines are ridiculous. Values haven't dropped that dramatically in the area we're looking to buy in.

Guess we're just gonna have to rent.

5:00 PM  
Anonymous Anonymous said...

Same situation here. We were 2 days away from closing and the underwriter said we need to put down 20%, instead of the 15% we were planning to because of the declining market value. We can't make $17k appear in 2 days. Now we don't have a loan and we need to be out of our apartment by the end of the month.

7:59 PM  

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