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Declining Markets and the State of Zero Down Loans

If “subprime” was the word of the year for 2007 then I think “declining markets” has a fair shot for 2008. Granted it’s a phrase, but it will be used often enough, that by the end of the year it will sound like one word “decliningmarkets”. Practice pronouncing at home so you don’t look foolish.

It all starts next week. Starting January 15, Fannie Mae will start enforcing its declining markets policy . Here is a summary of this new guideline:

“Current home price trends indicate that home values continue to decline in many markets across the country. As a result, and based on our continued monitoring of loan performance, Fannie Mae is reinstating a policy to restrict the maximum loan-to-value (LTV) ratio and combined loan-to-value (CLTV) ratio for properties located within a declining market to five percentage points less than the maximum permitted for the selected mortgage product.”

“The reinstatement of the maximum financing policy and the other changes outlined in this Announcement are necessary in light of current market conditions. These policies are effective for all loans delivered with application dates on or after January 15, 2008.”

I know Freddie Mac has a similar policy already in effect.

The declining markets policy will most severely affect MyCommunity and Flex loans. Until now we were able to do such loans upto 100%. However, if the home is in a declining market then we have to ask for a 5% down payment from the borrower. Now what constitutes a declining market is left to the appraiser to define in most instances and the lender is given the responsibility to make the proper adjustment. Fannie Mae though will include a warning (defined to within the propety zip code) during its automated approval process.

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Does this mean 100% financing is dead? Most certainly not. So don’t you go out there thinking 0% down is no longer available. FHA and VA is still around and neither agencies have any immediate plans to change guidelines. This is not to say they don’t care about potential falling values.

In fact both FHA and VA are asking for detailed explanation on whether or not the property is in a declining market. They have not indicated that they will then force the borrower to put more money down. Remember this could change in the course of the year but is highly unlikely.

Its not just Fannaie and Freddie either. Mortgage insurance companies are also limiting their exposure in declining markets. I have reviewed the policies of three major insurance providers and they will no longer insure loans to 100% loan to value (LTV) if the property is found to be in a declining market.

In many ways the loss in insurance options isn’t really too significant since 100% loan programs are not available outside VA and FHA anyways. But what this means is cost of insurance for higher LTV will most certain be going up.

In summary, 100% loans are still available. Refrain from being misinformed. Only MyCommunity loans are significantly affected. With the FHA modernization bill coming along nicely I expect any loss to be slightly mitigated through FHA. However, FHA is moving towards a risked base insurance structure. So, while 0% down will still be available, it will be somewhat more expensive.

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Written By

Writer for national real estate opinion column, focusing on the improvement of the real estate industry by educating peers about technology, real estate legislation, ethics, practices and brokerage with the end result being that consumers have a better experience.



  1. Matt

    January 15, 2008 at 10:40 pm

    Please be aware that while this article on declining value is thoughful and well written, unless you are a veteran of the millitary 100% loans will more than likely be gone soon. FHA loans are 100% loans, they are 97% loans and unless the current lawsuits with HUD are successful, sellers will no longer be able to contribute the 3% down. Fannie Mae is only allowing 90% on condos now, Freddie has a history of following suit. I live in an area of good appreciation over the last 3 years and my zip code has been designated by Fannie as declining value. Many areas of the Denver market are simply not declining but fannie is running so scared with the losses they have experienced and will continue to experience the pendulum is swinging…

  2. Ray SAenz

    January 28, 2008 at 11:50 pm

    For today, I do not think that it will be available 100% financing, 🙂
    am I wrong?

  3. tchat

    March 23, 2008 at 10:14 am

    My credit is very good, still citimortgage is asking for 15% down after giving verbal assurance that 5% down will do. The property somehow is in a declining market although the sales history of the town does not indicate so(only 6% down according to zip code[01890] decline history). I agree that fannie is running scared and designating towns as declining market at random. I would like to know the basis by which this is being done.

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