Could the controversial mortgage-industry practice of listing hundreds of local real-estate markets as "declining" — and restricting...
Could the controversial mortgage-industry practice of listing hundreds of local real-estate markets as “declining” — and restricting lending through higher down payments or credit scores — be scrapped?
The two biggest players in the home-mortgage field, Fannie Mae and Freddie Mac, did precisely that May 16.
Reversing its policy of penalizing buyers in troubled real-estate markets with 5 percent higher down payments, Fannie switched to a policy of charging borrowers the same minimum down payments no matter where they are.
Freddie Mac spokesman Brad German said his company would be indefinitely suspending its declining-markets policy as well.
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Starting June 1, mortgage applicants underwritten by Fannie Mae’s automated system online will qualify for 3 percent minimum down payments, wherever the property is.
Borrowers whose applications require manual underwriting will have to put down at least 5 percent.
Fannie Mae had been requiring applicants in designated declining markets to pay 5 percent more down compared with borrowers in nondeclining areas.
Freddie Mac’s policy, which never used a list of specific areas designated as declining, relied on lenders to flag applications using appraisal data or home-price indexes.
Freddie’s policy also required borrowers to put down 5 percent more.
Critics, ranging from the National Association of Realtors to consumer-advocacy groups, had charged that Fannie’s policy served to further depress sales and real-estate values in areas painted as declining.
Critics also argued that many metropolitan markets seeing price decreases contain submarkets that are doing relatively well and don’t deserve to be underwritten as high-risk.
Marianne Sullivan, Fannie Mae’s senior vice president for single-family credit and risk management, said the policy reversal was possible because of improvements to the company’s automated underwriting system — allowing it to “assess each loan more precisely.”
That change was welcomed by national real-estate and housing groups.
Dick Gaylord, president of the National Association of Realtors, said ending a policy that stigmatized certain communities will help stabilize the credit markets.
David Berenbaum, executive vice president of the National Community Reinvestment Coalition, said his group hopes the revised policies at Fannie Mae and Freddie Mac will prove to be a model for others to follow.
Whether that happens any time soon is far from certain.
Private mortgage insurers, who provide loss protection to lenders on loans with low down payments, have virtually all adopted highly restrictive policies affecting ZIP codes or metropolitan areas they designate as distressed or declining.
MGIC, the largest-volume insurer, recently expanded its list of distressed markets along with cutbacks on specific types of low-equity loans.
As of June 1, MGIC will not insure condominium-unit mortgages in the entire state of Florida. It also has abandoned cash-out refinancings and loans on investment properties.
PMI Group, another major underwriter, has banned cash-out refis or investor loans in areas it judges to be distressed. Genworth Financial will not consider applications on second homes anywhere in Florida.
AIG United Guaranty no longer will write insurance on condominiums in any of hundreds of ZIP codes around the country that are on its declining-markets list.
Terry Souers, a spokesman for Genworth Financial’s mortgage-insurance unit, said the company will consider the changes at Fannie Mae and Freddie Mac and “will take them into consideration to see if additional steps are necessary.”
But Michael J. Zimmerman, senior vice president of investor relations for MGIC, scotched hopes for any quick abandonment of the restrictions at his firm.
“We’re not contemplating any changes,” Zimmerman said.
MGIC, which reported a $1.4 billion loss for the fourth quarter of 2007 and a $34 million loss for the first quarter of this year, has been hit hard by claims because of foreclosures and extended delinquencies in once-booming housing markets.
What’s the trend line here? Fannie Mae’s and Freddie Mac’s policy switches should open the door to additional low-down-payment mortgages — and home sales — in areas once tagged as declining.
But without the participation of private mortgage insurers — who report solely to stock-market investors rather than Congress — many borrowers likely will have to turn to the Federal Housing Administration, which accepts down payments of 3 percent and does not have declining-markets restrictions.
FHA loans can be bought by Fannie Mae and Freddie Mac.
Kenneth R. Harney: firstname.lastname@example.org