Born Again: Appraisers, Lenders, Find Jesus

by Alex Stenback on January 12, 2008

From Jim Buchta in Today’s Star-Tribune:  Eroding Home Appraisals Latest Blow to Buyers, Sellers:

[W]ith house prices falling and the mortgage markets in disarray, more consumers are feeling the effects of a crackdown on appraisals by lenders and regulators…

"We’re paying more attention to the overall economics of where a house is located, how many homes are for sale in that area, what is the supply — and it varies from neighborhood to neighborhood," Arrigoni said…

Fannie Mae, the nation’s largest provider of mortgage money, which has issued new rules aimed at protecting lenders and reducing the likelihood that homeowners will find themselves upside down on their mortgages.

The gang over at Calculated Risk has dubbed lender’s admission of mortgage related losses ‘Visiting the Confessional’, so we thought we’d add our own little ecumenical turn-of-phrase to the mortgage crisis.

These new rules actually aren’t new rules at all. The declining market restrictions, for instance, which require a 5% increase in minimum allowable down payment if the property is in a decling market, has been around forever. It’s just that the industry is now being forced to re-discover these "new rules" and sound business practices after all but ignoring them during the heady days of the real estate boom. Finding Jesus indeed.

{ 3 comments… read them below or add one }

Nate January 14, 2008 at 11:55 am

The rules have obviously changed for first time home buyers, but what type of mortgage products are available to them?

What are we talking for down payments now? A few years ago, regardless of credit, it was relatively easy to get a mortgage with 0-5% down. So for good credit are we just at 5% minimum now? What about for worse credit scores?

Editor/Alex January 14, 2008 at 12:28 pm

A good credit borrower can still purchase zero down, so long as the property is not in a declining market, though only in fairly narrow circumstances.

Before we get to exactly what they are, here’s the other issue – though Fannie and Freddie allow zero down if the appraiser can make a defensible case that the market is stable (even if some of the Macro price indices like Case-Schiller, OFHEO, etc. and Desktop Underwriting software are calling it declining, or potentially declining) it may not matter, because the mortgage insurers have (or soon will) declared the Twin Cities MSA a declining market, and will not insure to 100%/Zero down, only a minimum of 5% down.

This puts us in a weird place where the rules put forth by the agencies and the rules put forth by mortgage insurers differ as to which circumstances zero down loans are acceptable. For the major mortgage insurers in our market, zero down is a non-starter, even though in some cases (with an appraisal supporting market stability) this loan is actually acceptable to the lender. It’s just the fact that nobody will insure it that makes it unnaceptable.

I’d expect these divergent guidelines between mortgage insurers and lenders to be back in sync by March.

So for now, the only way to truly go zero down as a buyer is to take mortgage insurance out of the equation. In other words, split the loan into an 80/20. There are still second mortgage lenders that will accept 100% financing, though it would not suprise me if that went away very soon as well (little known fact: These high LTV purchase money seconds are also insured, it’s just that the lender is buying the insurance, and there is no premium to the borrower. It is only a matter of time before these lenders can no longer find insurance for zero down/100% seconds.)

And of course, these guidelines are changing VERY fast, so the shelf life of this post is about 30 seconds.

For less than 5% down, FHA may be the only game by spring.

Nate January 14, 2008 at 3:11 pm

Thanks for one heck of a response. That’s why I read this blog, there’s always more to learn.

I hadn’t considered mortgage insurers as part of the equation for what products were available, especially when dealing with little money down. Their role is critical, and will definitely start to impact people.

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