Mortgage News

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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