Market Conditions

FANNIE & FREDDIE REMOVE THE 5% “DECLINING MARKET” PENALTY

In the last couple of weeks, both Fannie Mae and Freddie Mac have lifted the 5% reduction in LTV required for loans in “declining markets”. For those unfamiliar with this policy, here’s what transpired in the past few months.

For markets designated as “declining”, “stressed”, or in some cases “severely distressed”, the agencies began requiring a 5% reduction in the maximum loan-to-value allowed. Thus the 100% conforming programs like My Community Mortgage and Home Possible had become de facto 95% loans.

At that point, borrowers had to come up with 5% in down payment and qualify under the 100% program rules (think income restrictions and higher interest rates) in order to get a loan. In turn, ordinary 95% conforming loan limits were reduced to 90%, and so on. This was the change that drove everyone back to FHA financing, where a borrower can still finance up to 97% of the price and use a non-profit gift from Nehemiah to cover the down payment.

So Why The Change of Heart?

That’s a question for which I’ve not found a good answer. The real estate market crisis certainly isn’t over–especially here in California, where the number of foreclosures hitting the market is at peak flow. Furthermore, Fannie Mae and Freddie Mac are still losing money on bad loans within their portfolios and have only escaped reform by the distraction of the current crisis and the upcoming elections. So what would cause them to take on additional risk at this point in the cycle?

In the absence of a better explanation, the cynical side of me says politics is at the root. Because at the same time that the Agencies are relaxing their rules, the mortgage insurance companies who insure these loans are in full retreat. At this moment, almost none will insure 95% loans anymore. So, Fannie & Freddie can play good dad and let you go to the all-nighter, knowing mom will never allow it.

So, if you are confused by the news, just remember it’s the mortgage insurance companies who really hold the key.