Since the beginning of 2008, Fannie Mae and Freddie Mac began to score U.S. Zips and Market Areas into those showing stability, and those in decline, based on sales price and units sold statistics versus last year.
Although few declining market areas have been identified here in Chicago and our suburbs, the effect has been devastating for some buyers.
Having an appraisal with the "Declining Market Area" box checked, as has happened recently on one of our condo sales in the West Rogers Park Neighborhood of Chicago, often resulted in a required "down payment premium" from the lender - usually, 5%. Many times, the bad news didn't come to the buyer until right before a contract Loan Commitment Date. At that time, for many, it was hard to come up with the additional down payment required by the lender. The transactions often fell.
Effective June 1st, however, in an attempt to stimulate weak real estate markets across the country, Fannie and Freddie are suspending the use of the "declining market" scores indefinitely. No matter the sales trend in a particular local market, the large U.S. Loan Funding Organizations will approve loans up to 97% of purchase price - subject to underwriting requirements, but not subject to the old "declining market" label. Last minute increases would not be required!
Cry "hooray?" Sadly, not yet!
The major Private Mortgage Insurance companies, who insure lenders for their risks in offering loans with LTV less than 80%, are not on board. Despite pleas from senior Fannie Mae and Freddie Mac management, PMI companies will continue to use geographic market rankings to affect their decision as to whether to insure certain mortgage loans. In some cases, the application of declining market data will actually EXPAND, to effectively exclude certain types of higher-risk mortgage loans.
MGIC, the highest-volume MI Underwriter in the U.S., and it's Senior Vice President, Michael J. Zimmerman, said his firm is "not contemplating any changes." Further, MGIC recently expanded its list of declining markets. It also drastically cut back its mortgage insurance offerings for certain higher-risk, lower-equity loans.
PMI Group,another major PMI Company, has stopped insuring cash-out refi's or investor loans in areas on its proprietary "distressed zip code" list. Mortgage Insurer AIG United Guarantywill no longer provide coverage to lenders on condominiums in hundreds of "declining market" ZIP codes.
Asked whether his firm might re-evaluate its declining markets policies in response to the changes at Fannie Mae and Freddie Mac, Genworth Financial spokesmanTerry Souers responded, "we will take them into consideration to see if additional steps are necessary."
Many Real Estate Practitioners feel that the initiative taken by Fannie Mae and Freddie Mac is long overdue in today's sluggish real estate market in many areas of the country. Without cooperation from U.S. Private Mortgage Insurers, however, most low-down buyers will still have problems obtaining their home loans, and closing on their purchases.
FHA Guaranteed Loans might be an option for some, but not all, of these low-down-payment borrowers.
See our post today @ BlogChicagoHomes.com for more, as well as a link to Kenneth R. Harney's article in the Sunday, May 26th Chicago Tribune's Real Estate Section.
DEAN & DEAN'S TEAM CHICAGO