I have recently heard from a number of realtors who have had questions about changes in lending guidelines as they pertain to the maximum allowable financing on properties in our area. I thought it would be appropriate to try to give you some information and clarification regarding the changes we have been alerted to and those that have already taken place. Changes are coming almost daily in the mortgage business and as we look ahead to next year. Fannie Mae and Freddie Mac have recently announced changes to their guidelines for loans made on properties found to be located in “Declining Markets”. The first question I am always asked is, “What determines a declining market?” The answer can be found either on the appraisal or in the details of an automated loan approval from one of the automated underwriting systems (ie. Fannie Mae’s DU engine or Freddie Mac’s LP underwriting engine). First, it is the job of the appraiser to assess the relative strength of the market where a property is located. For many years, the small check box on page one of the appraisals was largely ignored since we were blessed with an expanding market. Now, appraisers are marking the check box indicating a “Declining Market”. Unfortunately, this current trend has caused all of the major national lenders, including the two biggest, FannieMae and FreddieMac to reassess their guidelines regarding lending in areas with declining markets.
In its December 5, 2007 Announcement 07-22, FannieMae amended its guidelines to state that “When a property is located in an area identified as declining, Fannie Mae will now require the lender to offer financing at LTV and CLTV ratios that are five percentage points below the maximum ratios allowed for the selected mortgage product.” They went on further to put an additional responsibility on the originating lender to use additional resources to determine the strength of the market on appraisals where the appraiser indicated the market as stable. They have directed us to ask for additional comps and other statistics on the local area to justify the “stable” evaluation. Most appraisers are now providing comps “on the market” as well, to demonstrate “current market conditions”. This serves as a more current indicator of the market than even sales that occurred a month ago. Freddie Mac has announced similar changes to their guidelines. FannieMae, FreddieMac and other automated systems have or will be making changes to their Automated Underwriting Systems (AUS) to address areas with declining markets. If they have not already done so, they will be building zip code indicators into their systems that will cause a warning to print out on the loan approval sheet stating that the subject property is located in an area of declining values which would prompt the 5% reduction in the allowable lending ratio. Therefore, when a prospective buyer has a “pre-approval” or an “approval” that was based done without a specific property address or zip code, the approval itself may very well be called into question. My advice to you would be to make sure that you understand how this could possibly affect either your potential buyer or a seller who has accepted an offer.
Our particular investors are providing some potential relief in certain circumstances. As soon as I take the time to explain those circumstances, they will most likely change again, but I have provided some information below that may help clarify what we know right now. As I said, the main determining factor is the appraisal. I have spoken to all of the appraisers I use and they tell me that most areas will have to be marked as “declining”, which means that more than likely the financing will have to be reduced by 5% from the maximum allowable limits. However, we do have some outs so don’t be totally depressed. There are areas that may not have to be marked as declining due to market trends in that particular area or neighborhood (see excerpt from an appraisal below). Another alternative is to use an FHA or VA loan. The government loans do not currently have these restrictions. Below is some additional information you may find helpful that was extracted from information provided to us from our investors.
Summary of Declining Market options:
Please note the these policies are specific to appraisals marked as a declining market, AUS messages addressing declining markets or investor-published lists of areas of declining markets. For most of our investors, we no longer must automatically reduce the maximum allowable LTV/CLTV when the only indication of the possibility of a declining market is on the AUS report. We must refer to each investor’s specific guidelines, but for several of our investors’ programs, we have the following options if our AUS report indicates the possibility of a declining market and the appraisal does not indicate a declining market:
1) Reduce the maximum allowable LTV/CLTV limit per program guidelines.
2) Or, If the LTV/CLTV is above 90%, the file may be submitted directly to the investor for underwriting at the maximum LTV/CLTV;
3) Or, if the LTV/CLTV is 90% or below, the file may be submitted to our underwriter for a preliminary review at the maximum LTV/CLTV. The underwriter will determine where the file needs to be underwritten based on the strength of the credit package and appraisal.
If the appraisal indicates a declining market, more than likely the maximum financing will be 95% for conventional loans or the buyer would have to use FHA or VA unless they fit in a very small box of other possibilities that currently exist. Below is an excerpt from a recent appraisal that was marked as stable based on information in the area where this home was located.
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