The policies of Fannie Mae, Freddie Mac and other major mortgage loan insurers are taking on new importance in the shaky home-price market.
Local industry observers, however, say they’re preventing qualified homebuyers from purchasing properties and could be hurting prices more.
Fannie Mae reinstated its declining-market policy on Jan. 15, and Freddie Mac’s similar policy – in effect since 2000 – has become more important to local lenders who sell to the government-sponsored enterprises as housing prices continue to slip. A declining market often is defined as one in which property values have dropped by at least 1 percent for two consecutive quarters.
According to the policies, if a property appraisal indicates a declining market or a GSE’s automatic underwriting system detects one, and the lender can’t provide adequate information to counter it, a borrower will have to come up with a down payment that is 5 percent greater in order to get maximum financing.
For most borrowers, that means coming up with a 10 percent down payment, instead of 5 percent.
“Everything about the borrower could be excellent, but [now] you have to tell them they face this declining-market issue,” said David Brennan, senior vice president for residential lending at Cape Cod Five Cents Savings Bank, which last year sold between 60 percent and 70 percent of its $360 million loan portfolio to the two GSEs.
Brennan said Fannie Mae did indicate just a couple of weeks ago that its declining-market policy no longer will apply to 95 percent finance loans on owner-occupied single-family homes, as long as the loans are purchases or refinances meant only to lower monthly payments.
Fannie and Freddie purchased about 40 percent of mortgage loans nationwide in 2007 and are expected to purchase even more this year, as Wall Street investors who once bought the loans have all but disappeared from the scene, noted Jim Jones, owner of First Wellesley Consulting, a financial services consulting firm in Wellesley.
That, he said, makes their policy decisions all the more important.
The declining market policies will delay some home seekers’ buying decisions because they’ll need to accumulate a higher down payment, Jones said. The lower demand that will result could have the effect of further dampening home prices, he added.
Another existing GSE policy also has regained importance in the current market, but is knocking out borrowers at the expense of property characteristics they don’t control, said Barry Thomas, branch manager at Amerihome Mortgage Co. in Burlington.
Neither Fannie nor Freddie will back loans on condominium purchases in new-construction facilities unless 51 percent of the condos in a given building have been sold to owners who intend to live there, as a first or second home.
“This has affected people. I’ve had buyers who can’t buy,” noted Thomas, who said he’s working with an “excellent” borrower who wants to buy a condo as an investment. The borrower put down 25 percent on a complex that has 360 units, more than half of which are investor-owned.
“It’s not allowed, because it’s not 51 percent owner occupancy,” said Thomas, who added that’s frustrating for him and for the borrower.
Thomas said collateral, the property on which a loan is taken out, “has always been one of the four Cs” for borrower qualifications. In the past, he said, all four have been given relatively equal weight. But today, it seems “collateral” is more important than the other three: a borrower’s character, credit and capability of making monthly payments.
‘Some Flexibility’
Although there are different commonly recognized definitions of a declining market, Fannie and Freddie let local appraisers decide if a certain market is declining. Their regulating agency – the Office of Federal Housing Enterprise Oversight, or OFHEO – produces a quarterly housing price index but says it does not define declining markets either.
Every county in Massachusetts except Franklin (which went up) and Hampden (which remained the same) fit this declining-market definition during the last two quarters of 2007, according to data from The Warren Group, parent company of Banker & Tradesman. However, some loans in those markets are getting through with the smaller down payments.
Some banks are deciding to make loans they intend to sell to Fannie and Freddie in markets that appear to be declining, even if the borrower has less than 10 percent to put down.
For example, virtually all of Barnstable County on the Cape has been “blanketed in however this declining market is defined,” said Cape Cod Five’s Brennan. “But it’s very different down here. You don’t have a lot of 200-lot subdivisions where every house is alike Â… it can be very different from neighborhood to neighborhood.”
Brennan has decided to go ahead with some loans he intends to sell despite the fact that the borrowers have less than 10 percent down, and the fear of a declining market stamp.
“We [just] document the heck out of that file,” he said, adding that he’s seen “some flexibility” on Fannie and Freddie’s end.
Brennan believes inflated home appraisals may have falsely contributed to declining value designations in his area. He said Cape Cod Five staff members have seen instances where people wanting to refinance out of Option ARM loans have come to the bank to do so, but found that with a re-appraisal, their home value dropped by as much as 40 percent in two years.
“The market here hasn’t dropped nearly that much,” Brennan said.
For example, a local newspaper recently reported Barnstable County values were down 11 percent in March 2008 compared to one year ago, he noted.
According to OFHEO, Barnstable County home values dropped 2.5 percent between December 2006 and December 2007.
Massachusetts Mortgage Bankers Association Executive Director Kevin Cuff said the Fannie and Freddie policies clearly aren’t the cause of the market slowdown, but aren’t improving things, either.
“[Lenders] could do more if we had more access to capital,” he said. “Their new policies are making it more difficult.”
Anything that makes it harder to buy a condominium is important because condos are often the choice of first-time buyers, who are an important segment of the homebuying market, Cuff said.
MMBA is sponsoring two classes on the new condominium guidelines this month due to members’ interest.
Major mortgage insurance companies, which provide lender-required borrower insurance on loans with down payments of less than 20 percent, also identified parts of Massachusetts as “restricted markets” in March. They use the definitions to determine their own minimum down-payment requirements.
“I would imagine you’ll see similarities between our ‘restricted’ and [Fannie and Freddie’s] ‘declining,'” said Katie Monfrey, a spokeswoman for Mortgage Guaranty Insurance Corp., the nation’s largest insurer.
MGIC uses OFHEO’s home-price predictions to help it determine those markets, along with National Association of Realtors median home price data, information from Moodyseconomy.com, and proprietary formulas.
MGIC designated Massachusetts’ Barnstable, Boston-Quincy and Worcester regions as “restricted” in March, meaning that for a primary, single-family residence, the company won’t insure a loan on which the borrower puts less than 5 percent down.
The minimum requirement to get MGIC insurance in non-restricted markets is 3 percent down.
The entire states of Arizona, California, Florida and Nevada have been on MGIC’s restricted list since January.
Brennan said MassHousing, the state agency that provides affordable housing loans and insurance, still offers mortgage insurance without down-payment minimums.
Bristol County Savings Bank Vice President for Mortgage Lending Nelson Braga has a more optimistic take on how declining market policies will play out.
He doesn’t deny that some borrowers – about 1 in 12, by his estimate – are prevented from getting a loan today because they can’t put together enough down-payment.
But in the long run, he believes the policies could help.
In markets that are declining, Braga said, prices will by definition continue to go down – ultimately giving more would-be homeowners access to the market.
“When you look at it as a big-picture issue,” he said, “I’m seeing more people able to finance homes.”
