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[5% Holiday Update] Declining Markets Get Smaller Mortgages

One of the problems with lack of transparency, is that people…errr…don’t know what you are thinking. Just like the fact that I have been weak in my quantity of postings as of late. I can’t explain it, because, well, I got tired of being, uhhhh…transparent. Needless to say, I am again transparent, and even more superficial.

One of the rumors floating around the appraisal/mortgage world [1]for the past few weeks, covers the topic of Fannie Mae’s restriction on loans in markets they designate as declining. It was even suggested that a restriction in one market versus another, suggests redlining [2]. However, I don’t see that correlation.

but i digress…

In a market that is declining, Fannie Mae will have a 5% higher loan to value ratio [3]so instead of requiring 20% down, it might be 25% if the local market is declining [4]. So markets with average mortgage amounts below the $417,000 conforming limit, this could have quite an impact.

>Current home price trends indicate that home values continue to decline in many markets across the country. As a result, and based on our continued monitoring of loan performance, Fannie Mae is reinstating a policy to restrict the maximum loan-to-value (LTV) [5] ratio and combined loan-to-value (CLTV) ratio for properties located within a declining market to five percentage points less than the maximum permitted for the selected mortgage product.

Notice the use of the word reinstating. This is a recurring theme in mortgage lending these days. Its not the introduction of new lending guidelines, its simply the enforcement of existing guidelines.

In theory, the appraiser gets to lead the way in determining declining markets (in sarcastic tone: shocking!, amazing!, incredible!)

>Fannie Mae strongly encourages lenders to use supplemental sources and tools to independently assess current housing trends, unless the appraisal indicates that the subject property is located within a declining market. When the appraisal notes that the subject property is in a declining market, the maximum financing policy must be applied. When the appraisal does not indicate that the subject property is located within a declining market, Fannie Mae strongly urges lenders to implement processes and apply supplemental sources and tools to validate current housing trends and not rely solely on the information reflected in the appraisal.

But the appraisal industry has been neutered so severely by the mortgage brokerage and mortgage lending industry with pressure to “play ball” that I am not confident the appraisal industry is able to have this responsibility in the first place until proper regulatory restrictions protecting appraisers are in place. No more than a small percentage (you know who you are) of appraisers would be brave enough to show a negative time adjustment for fear of losing a client. I hope recent enforcement actions by the NY Attorney General [6]and the SEC [7] will make a difference.

Still, its a prudent and thoughtful first step for Fannie Mae to take. One of the things that drove me crazy in prior periods of market decline, lenders would send out policy notices saying they would not allow negative time adjustments. We would argue back, saying that this was an underwriting issue and it was simply a matter of adjusting the loan to value ratio, not to mandate rose colored glasses and ear plugs for the eyes and ears of the lenders. We either dropped them as a client or they changed their mind.

The byproduct of this action in declining markets will likely be even lower sales volume via stricter credit, placing more price stress in already distressed markets.

I can’t help but see the irony here: the reduction of Fannie Mae’s loan to value criteria in declining markets could actually lead to more foreclosure volume and more exposure for lender’s collateral. But in the long run, its a prudent action.

This restriction in declining markets should never have been lifted in the first place. It is better for the stability of the lending system by re-introducing the concept of risk awareness to lending decisions.

Now thats a concept I think we can risk having.


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