Declining Markets - Risk Assessments By Lenders Limit Loans

When property values peaked in 2006, we began to watch
a slow decline in values. This was all part of the natural ebb
and flow of markets, and especially in California, it is a
phenomenon that we have gone through before.

In the first quarter of 2007, however, we started to see
the surfacing of the "sub-prime crisis" that fully evolved by
mid-year.

In addition to the natural softening of home values, we now
had an extraordinary number of loans going into default,
with foreclosure activity increasing in alarming percentages.

The foreclosures accelerated the decline of market values
as more and more homes were coming on the market
where a homeowner was "giving the home away" to get
out from under their mortgage obligation.

Also, many borrowers were trying to sell their home even
though the amount they owed on the mortgage was more
than they could ask from a reasonable buyer. These are
commonly called "short sales" requiring lender agreement
to accept less than what is owed on the home.

As lenders took the homes back through the foreclosure
process, they now were marketing the homes to get as
much as they could for them. But, they were more
interested in getting the homes off of their balance sheet
and were less concerned about holding out for a particular
price.

So, we had a tsunami of lower-valued homes flooding the
market place, bringing everybody's values down in the
process.

New loan requests typically require an appraisal of the
home to determine the value. One of the major items that
an appraiser is expected to evaluate is whether the
neighborhood is in an appreciating, stable, or declining
market. As you might expect, almost all of the appraisals
have been coming back that homes are in a declining
market.

Underwriters of loans are supposed to analyze the appraisal
of the home as part of their evaluation to approve a loan
request or not. Each loan request traditionally was
reviewed on its own merits with the quality of the borrower
and the quality of the home both integral to the decision.

What has developed recently is a decision to overlay a
valuation determination that removes the underwriter's
ability to assess each loan on its own merits. Many
counties in California have been assigned to the category
of "declining markets".

What this means is that if the lender normally would consider
a maximum loan of 100% of the value of the home to a credit-
worthy borrower, and the home is in a "declining market", that
they will now lend no more than 95% of the value of the home.

This 5% reduction in maximum loans in relation to the value
of the home (LTV) is being applied across the board, even if
it can be proven by market data that a particular neighborhood
does not suffer from the distress that many other communities
are going through.

As an example, one of our major lenders published a list of
counties in California. Out of the 34 counties, 20 were listed
as "Severely Distressed", 12 were listed as "Distressed", 1 was
listed as "Soft", and only 1 had no negative label.

Because of this, and the fact that these kind of designations
are being imposed by regulators and FNMA and FHLMC guidelines,
loan programs that used to be readily available are being cut back.

If you are anticipating seeking a loan that pushes some of the
traditional maximum LTV limits, be prepared to hear that you
need more down payment or a larger equity position to get the
new loan.

As the pendulum has swung away from the permissive under-
writing that we saw prior to the "sub-prime crisis" and back to
conservative underwriting, this is another element that we must
deal with to help borrowers get loans that meet their needs.

Keep exploring options, ask lots of questions, and work with
mortgage professionals who can help counsel you through the
changes in the mortgage business right now.

President Signs the Stimulus Package-Conforming Limits Set to Increase Temporarily

Matthew Padilla of the Orange County Register put together
some facts about the new Stimulus Package and it's effect
on the FNMA/FHLMC conforming loan limits.

I have edited some of his research to apply it to how it may
affect the San Diego housing market.

Because it calls for increasing the conforming loan limit, it
now opens up the marketplace to sell loans - which were
previously classified as jumbo loans - to Fannie Mae and
Freddie Mac.

The jumbo loan market has dried up substantially since
around August last year with the available loans being
more expensive. FNMA and FHLMC have been the major
players in buying loans, this will provide needed liquidity
to an under-served portion of today's market.

The new limit is set to be 125% of an area's median home
price, but the law does not saw which median home price
will be use.

It gives the HUD Secretary up to 30 days to post a list of
median prices and conforming limits. A spokesman for HUD,
said prices will be set via counties, unless there's a
compelling reason to do it differently in certain areas.
The bill caps any increase to $729,750.

The new limits should be posted in early March on
www.hud.gov.

Theoretically, consumers can expect to have these changes
available in the next thirty days. But there are steps that
must occur before programs are available.

One of our major lenders has tried to manage everyone's
expectations by outlining the expected procedures.

First, FNMA and FHLMC will be assessing their internal
impacts to determine the delivery approach they will require
of mortgage lenders and investors.

Second, FNMA and FHLMC must communicate their
requirements to mortgage lenders and investors. This would
include maximum loan-to-value ratios, minimum credit scores,
whether refinances will allow for cash-out and any
number of other variables that will be considered in their
risk-assessment model.

Borrowers need to understand that FNMA and FHLMC are
now taking on some of the risks that the private investors
were previously taking. If a new $625,000 conforming loan
were to default, it would represent the equivalent of 1.5 loans
of $417,000 that could have defaulted.

Third, the lenders - once they have seen the loan programs
and parameters that FNMA and FHLMC have stipulated -
must modify their loan programs to meet those requirements
and make them available to consumers.

Those borrowers between $417,000 and up to the new loan
limit should find it cheaper to get a new loan, compared to
today's jumbo rates. We will have to see what rates are
being offered when the changes are implemented and
available to the public.

The changes are temporary, with a time limit imposed of
December 31, 2008. Congress could choose to extend
the time frame, but any consumer looking for whatever
relief may be available would be wise to act sooner, not
later.

This law should allow for more liquidity in the mortgage
market, and when money is more readily available, interest
rates have the opportunity to come down.

Let's hope that FNMA and FHLMC act quickly, that they
are not too restrictive in their risk assessments, and that
the lenders put the programs into place quickly as well.

Then we can offer more solutions to worthy borrowers who
are looking for relief from their current mortgage predicament.