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.