MARK FOREMAN ‘Long way to go’

Simon says, “Lower your down payment requirements.”

While Fannie Mae and Freddie Mac lead like Simon in the popular children’s game, the industry is watching to see if the mortgage insurance companies play along.

“Until the investors and the mortgage insurance companies adopt Fannie and Freddie’s policies, it’s not going to change anything,” said Kim Neilson, senior vice president at New Britain-based McCue Mortgage Co.
Fannie and Freddie have dumped their “declining market” policies that forced borrowers to plunk down an extra 5 percent for their minimum down payments in areas where house prices are deemed to be falling. And while that is welcome news for cash-strapped buyers, the mortgage insurance companies still are requiring higher down payments, Neilson said.

“It will take them a while to adopt Fannie and Freddie’s policies, if in fact they even want to,” Neilson said. She suspects that will happen, but “how long will that be – I don’t know.”

There already is a pattern for the mortgage insurance companies following the agencies’ lead.

“The reason [mortgage insurance companies] all had these [higher down payment] policies in place was because Fannie and Freddie had the policy to start with,” Neilson said.

“So all of their policies went into place because of what the agencies required,” Neilson said. “Now Fannie and Freddie have stepped up to the plate and said, ‘We’re not going to do this any longer.'”

The agencies’ declining market policies went into effect in January.
Peter Milewski suspects he knows one of reasons for the change.

“I think what they were concerned about was a bias against those markets that were hardest hit by foreclosures,” said Milewski, director of the mortgage insurance fund at MassHousing, a quasi-state agency that funds and insures affordable home loans. Those declining markets were largely urban, low-income markets, he said, adding that the agencies might have trashed the policy in the spirit of fair lending.

‘Mutual Best Interest’

The change, however, does not represent a return to the way things were before the housing market’s downturn, he said.

“It’s still not the 100 percent [loan-to-value] ratio that they were at prior to the declining market implementation,” Milewski said. The change calls for a maximum loan-to-value ratio of 97 percent, in both declining and stable markets, he said.

“I think one of the reasons Freddie Mac and Fannie Mae have done away with 100 percent financing is because there are no private mortgage insurers offering to insure 100 percent loans any longer,” Milewski said.

“The relationship between [Fannie and Freddie] and the private mortgage insurers is very symbiotic,” Milewski added. “They make money when each other are making money, and they lose money when each other are losing money. So right now, it’s in their mutual best interest to stop the bleeding by improving quality controls and tightening their underwriting criteria so that both of their businesses can be more profitable.”

This latest change by the agencies represents just one step among many that the industry wants to take in correcting the housing market.

“This is one of probably 10 or 20 different things that we have to do, and the federal government has to do, to try to get the market to stabilize to the point where it’s not af-fecting the economy negatively,” said Mark Foreman, a former president of the Connecticut Association of Realtors and founder of Cornerstone Capital Mortgage and Real Estate Services in Fairfield.

Steps that already have been helping include raising loan limits at government-sponsored enterprises Fannie, Freddie and the Federal Housing Administration, as well as the Federal Reserve Board’s latest rate cuts, he said.

“[Congress] is certainly paying a lot of attention to this issue because of the economy, but they still have a long way to go,” Foreman said.

Another potential boost to borrowers is a $7,500 tax credit for first-time buyers – a measure approved by the House but facing the threat of a veto by President George Bush.

“We’re all hoping that there will be some form of tax credit for buyers,” said Ken DelVecchio, president of the Connecticut Association of Realtors and a broker-associate at RE/MAX Heritage Real Estate in Fairfield. “It’s something that a lot of buyers are waiting for.”

To get those shoppers off the fence, DelVecchio said the idea either should be adopted quickly, or taken off the table.

“Even a $3,500 tax credit for a buyer is something,” DelVecchio said. “It’s another piece of the puzzle that can only help the housing market.”

Should the mortgage insurance companies adopt Fannie and Freddie’s latest change in down payment policy, it would have the potential to affect many New England mar-kets.

For example, “Norfolk County – the entire county – was deemed a declining market” by Fannie and Freddie, said Penny Hamel, president of the North East Builders Associa-tion of Massachusetts in Tewksbury.

“And the mortgage insurance companies have basically said the entire state” of Massachusetts is a declining market, Hamel said. “What’s happening now is that some of the individual companies are going back and trying to negotiate waivers.”

In Connecticut, places in Fairfield and New Haven counties were particularly hard hit by the declining-market label, Neilson said.
Even though some individual markets were performing well, Foreman added, they were lumped in with the areas tagged as declining.

There are three different mechanisms that can trigger a declining-market designation, Neilson said. One is if it comes up in Fannie or Freddie’s automated underwriting processes, she said. Second, insurers and investors have come up with their own lists of certain towns and areas, she said. And finally, the property’s appraisal report itself includes a section that indicates whether values are declining, she said.

“As an originator, we would look at those three things,” Neilson said. “So it’s been very complicated.”

‘A Terrible Idea’

Declining-market policies have not been popular in the real estate and lending industries.

“It was just a terrible idea,” Foreman said. “You go through a period of seven to 10 years where first-time homebuyers are able to put down 3 [percent] to 5 percent and get into a home. And 95 [percent] to 97 percent of those folks are still in their homes and doing fine. So if you look at that success rate, why would take away something that worked?”

If the policies tightened too much, the trend might now be going the other way – at least a little.

“As the market stabilizes, hopefully, they’ll re-look at some of these policies they’ve put in place,” Neilson said. “And I think that’s happening, because they have now retracted the declining-market policy.”

Meanwhile, until the mortgage insurance companies follow suit, Milewski expects the more borrowers will be coming to MassHousing as an insurer and purchaser of home loans.

“The one thing [the policy] is doing is driving a lot of business to us for two reasons. We’re a consistent investor in the purchasing of loans at high loan-to-value ratios for low- and moderate-income first-time homebuyers – which are a large part of the market right now,” he said. In addition, he said, MassHousing has its own mortgage insurance fund to insure loans.

“And that’s important to understand because it doesn’t make any difference what Freddie Mac or Fannie Mae will buy; what is important is what the private mortgage insur-ance industry will insure,” he said. “And there are a lot of mortgage insurers in Massachusetts that will not do loans above 95 [percent loan-to-value ratio] even if Freddie Mac and Fannie Mae are buying them.”