"You've Caught the NET!"

This one seems to have snuck up on us!

It was prompted by coverage in the Wall Street Journal, in their "Developments" blog yesterday - "Home Prices Are Low, But Getting A Mortgage is Tough!"

Chicago - the entire metro area - is now on AIG United Guaranty's Declining Markets List.  This has occurred, despite the fact that our Real Estate Market here is vibrant, even growing, in many Chicago Neighborhoods and suburbs!

AIG's answer to this - they cannot more precisely identify "declining market areas."  Would you agree with this?  Didn't think so!

We all know the mortgage market has been battered by default over the past year.  High-leverage conventional financing is just about gone.  Stated income loans are just about gone.  And Mortgage Insurance Companies are feeling the heat as well - many of the loans they insured are now in foreclosure, and the equity they counted on to make themselves whole has disappeared.

Mortgage Insurer Triad Guaranty, Inc. is leaving the Mortgage Insurance business.  MGIC is raising its MI Premiums nearly 12%.  And the beat goes on!

But what does this mean, in practical terms?

Even those with a previously-comfortable 10% down payment may have to pay a 5% "declining market fee" in order to close.  Often times, the buyers are told this very close to closing - and they just don't have the reserve funds to cover, especially on short notice!  They often have to walk away from their purchase.

As recently as a year ago, many were singing the death knell of PMI.  With the liberal lending standards of a couple of years ago, many home buyers were able to avoid paying for PMI by taking out two separate loans against their new homes - a main loan for 80% of the purchase price, plus a second, higher-rate loan to cover between 10 and 15% of the outstanding balance.  Thus, PMI was not required.

Today, however, such "piggyback loans" have virtually disappeared, and more of those with a low down payment are forced to purchase mortgage insurance.  The percentage of new home buyers using PMI increased from 8.5% in early 2006, to 20% during the Fourth Quarter of last year.  Since then, into 2008, the percentage of buyers seeking PMI has come down to roughly 13% - many low-down-payment buyers have simply left the market!

An increasing number of borrowers are turning to FHA Loan Programs as PMI requirements become tighter.  FHA is more liberal in its credit and down payment requirements - as little as 3% down can get a borrower an FHA Loan - although FHA recently began charging those with riskier credit histories a premium on the loan.  Importantly, FHA loans are not subject to "declining market" lists!

It is estimated that FHA loans now make up between 10 and 12 percent of new home loans, up from 3% two years ago, when conventional loans were easier to obtain.

In reality, many would think the falling prices in today's Chicago Real Estate Market would have the buyers marching in.  Many do - but many have been disappointed when they can't find financing!

See our post from yesterday evening at BlogChicagoHomes.com for more information, as well as a link to Amy Merrick's article in yesterday's Wall Street Journal.  Amy's article contains a current map of Mortgage Insurer AIG Guaranty's Declining Market List.

Here's the PDF file delineating the affected market areas and zips.

DEAN & DEAN'S TEAM CHICAGO