“Declining Market” Designation Going Bye-Bye on June 1
As many of you already know, Fannie Mae’s “declining market” designation is going bye-bye as of June 1. From Mary Umberger’s column in the Tribune:
The policy typically added 5 percent to the down payment needed in 8,000 to 12,000 ZIP codes where home values were dropping. Many of Fannie’s critics saw it as a long-overdue dose of fiscal castor oil necessitated by too many shaky loans to borrowers who had little of their own funds on the line.
We debated the declining market designation here on Crib Chatter (as some of you thought that the near north side zip codes were NOT designated as declining markets.)
It’s all for naught now, as Fannie is abandoning it. Why?
Having to come up with 10% down was killing sales.
The real estate community was more blunt. It howled that the policy was killing deals, period. The National Association of Realtors complained in writing that basing policies on ZIP codes oversimplifies a micro-market situation. In other words, healthy neighborhoods were being stigmatized by their neighbors, it said.
So, just six months into the tougher rules, Fannie Mae has killed the declining-markets requirement. As of June 1, it will require minimum down payments of 3 to 5 percent on all loans it guarantees for single-family, owner-occupied properties.
The realtors love the change, of course. Easy lending means they can move more properties. And that’s the name of the game.
“I think it’s a good thing,” said David Hanna, president-elect of the Chicago Association of Realtors. “Credit continues to be too tight. Until the issues around financing and credit get resolved, we’re going to stay in this place where we are.”
Others said Fannie was caving to pressure. “We all know one of the critical factors in the rise in defaults was very low down payments, ” said Paul Kasriel, chief economist for the Northern Trust in Chicago.
He conceded that, yes, in the short term, the new policy might help move some houses–not exactly something he opposes, given that he has been trying to sell his home for more than two months.
But, he said, rolling back the declining-markets rule is chancy for Fannie.
“They’re taking on more risk, that’s the bottom line,” he said. “They’re acting in a way that appears to be one of the key factors that got us where we are now.”
But will it really ease the credit crunch? And what about the condo market?
There is still that little thing called “PMI” (or Private Mortgage Insurance). Remember that?
For condos, it seems the tight lending requirements may remain. From the Tribune:
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 metro areas they designate as distressed or declining.
MGIC, the largest-volume insurer, recently expanded its list of distressed markets along with a series of cutbacks on certain low-equity loans. As of Saturday, MGIC will not insure condominium unit mortgages in Florida. It has also 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 in Florida. AIG United Guaranty no longer will write insurance on condos in hundreds of ZIP codes around the country.
The question will remain, are certain parts of the Chicago market “distressed” that buyers will still be required to pony up larger downpayments?
Where Fannie goes, PMI unlikely to follow [Chicago Tribune]
So much for ‘declining markets’ [Chicago Tribune]
Or you could just lower home prices instead………….. Somehow trying to put more air into a burst bubble will eventually prove to be futile.
I agree, John. Hasn’t Fannie Mae learned anything in the last couple of years? If someone puts 3% down and prices decline 5% what do you think is going to happen? And of course the real estate industry is in favor of this because it lines their own pockets.
Ultimately, it’s like trying to build levees to keep out the ocean. Prices are going to seek their own level and these irresponsible actions may just delay the inevitable.
Leave it to our government-chartered agencies such as FNMA and GNMA to give us more of the same poison that caused the problem to begin with.
As if we don’t already have enough bad debt, we are going to encourage more of the same.
Looks like I’ll continue to be priced out. I don’t feel like bidding against no-down buyers who are borrowing ridiculous multiples of their incomes just to drive the prices up.
I think this action is to increase fluidity in the real estate market so that people can sell their houses. Right now a lot of people are locked into their homes unless they take a big hit. However, the consequence will clearly be more costs to the taxpayers. The homeowners need to just take the hit, not the American taxpayer.
How long before goverment steps into PMI business? Its amazing- in boom times banks, builders, brokers and realtors lobbied to get fannie and freddie out of mortgage business through increased regulation. Now everyone wants them to step in and save the day with taxpayer money.
i guess Fannie Mae correctly figures that the true risk is shouldered by the taxpayers who ultimately guarantee their loans and everyone else who uses US dollars to live. The Fed can just print money to cover the defaults.
This about-face by Fannie Mae clearly shows that the company really and truly does not know what it is doing, management does not have a clear direction for the company and may not even be pulling the strings.
If I was a Fannie/Freddie stockholder I’d be bailing. Management does not have any strategic direction whatsoever and is taking the position of taking on more balance sheet risk to maintain transaction volume. Fannie and Freddie’s management now are obviously counting on a taxpayer bailout, either that or they realize that they’ve already bet the farm so theres no reason to leave the casino just yet.
Since it’s clear that the taxpayers will be forced to bail out collapsing markets every time the financial players working in concert with an accommodating Fed, engineer a massive credit bubble, could we at least have some meaningful regulation?
The low down payment requirements would not be so dangerous if they were accompanied by tight lending requirements, such as full documentation of income and assets, and a low loan-to-income ratio, of no more than 2.5X the borrower’s income.
However, our financiers now know that Congress will engineer bailouts and the Fed will destroy our currency, in order to bail them out, so why not just create another bubble? They will once more begin to make a huge transaction fee off flips and refis and all the other nonsense that created this debacle. The only people harmed are idiot borrowers who take the bait, and, of course, everyone priced out by the insane runup in prices, but who will have to help pay for yet another bail out.
Laura,
You may very well get your wish on that one. Treasury secretary Paulson is working on a complete regulatory overhaul of the financial sector. Including consolidating the OTS and OCC, among other things. Not too sure on details nor if anything will get done in an election year, but major financial regulation is afoot.
Google: “paulson overhaul finance” and its the first article listed.
And of course: none of these proposed regulatory reforms will do a lick of good to get us out of this current mess..
If anyone thinks fannie/freddie are private companies in a true sense they should think again. They are just surrogates for goverments housing policy du jour. Shareholders are already screwed. Bond holders will be bailed out with tax payer money. It will happen within the next year. Stay tuned.
The mortgage insurance companies are not going to be selective about certain areas od Chicago.Effective 5/22 they require a 10% down payment on all condo’s located in the city of Chicago.
TomB,
This is still more lenient than a decade ago when it was 20%, before the advent of this 80/10/10 chicanery.
Bob,
This is true,but on an 80/10/10 loan,PMI is not an issue because of the 80% 1st mortgage balance and a 2nd loan given for the 10% balance.
How many places are still doing 80/10/10s? I had heard those types of loans were going away. The banks are reluctant to lend for the second mortgage (due to the foreclosure scenarios).
Does anyone know?
why would banks want to issue mortgages at this point? I certainly wouldn’t and thats why the GSE has to step up to provide liquidity in this market. This involves my tax money but at least it prevents the total collapse of the market.
UBS started issuing rights to boost their liquidity and admitted that they may take further losses on their mortgage security portfolio. If the top bookrunners are taking losses in their mortgage inventory and the market for their securities are dry, why would they?
The GSE are the only companies that can keep this alive. However, this new policy is going to cause more trouble in the future.
I know that Fifth Third and US Bank are still doing the 80/10/10 loans and Fifth Third will still do an 80/15/5 if a person has strong credit.
Thanks TomB. At what interest rates? Much, much higher on the second, I would assume.
This is increadably irresponsible. All the evidence indicates that the prices of houses are going to decline further by more than 5%. So all of those loans made from 3-5% are going to end up being upside down P.D.Q.
Captain,
The fed (read American taxpayer) has essentially become the gaurantor of all risk on wall street. Investment banks are exchanging crap paper marked as AAA for treasuries from the exchange window. There is no risk for wall street, none. Party on!
http://www.washingtonpost.com/wp-dyn/content/article/2008/05/26/AR2008052601812.html
Sabrina,
I am not familiar with US Bank’s rates.but at Fifth Third,a credit score of 680 to 719 your rate will be prime + 1.25 and if you are 720 or above your rate will be prime + .75.
They will also do a 15% 2nd at prime + 2.25%.