Declining Markets

As a first time home buyer, you may not yet be familiar with the latest mortgage buzz word “declining markets”.

So you may be asking then, what does it mean?

Simply, Fannie Mae (FNMA - Federal National Mortgage Association) and Freddie Mac (FHLMC - Federal Home Loan Mortgage Corporation), have introduced new rules affecting "loan-to-values" (amount financed as a percentage of home value) for home mortgages originated in designated geographic markets.

Fannie Mae and Freddie Mac are US government sponsored public corporations that buy and pool qualified mortgage loans from their originating financial institutions. They then issue securities backed by their guarantee (and not that of the US government) against the mortgage pool for sale in the open market to provide fresh funding for home mortgages. Fannie Mae, as it is popularly called, is the largest US player in the secondary mortgage market, while Freddie Mac is the second largest US player in the secondary mortgage market.

As stated by Fannie Mae:

“Current home price trends indicate that home values continue to decline in many markets across the country. As a result, and based on our continued monitoring of loan performance, Fannie Mae is reinstating a policy to restrict the maximum loan-to-value (LTV) ratio and combined loan-to-value (CLTV) ratio for properties located within a declining market to five percentage points less than the maximum permitted for the selected mortgage product.

The reinstatement of the maximum financing policy and the other changes outlined in this Announcement are necessary in light of current market conditions. These policies are effective for all loans delivered with application dates on or after January 15, 2008.”

How does this affect home buyers in Pinal County?

Let's say that you have applied for a mortgage based on a purchase price of $200,000, with a 5% down payment. Without "declining market", you could borrow $190,000 or 95% (95% Loan-to-Value) of the purchase price.

However, if the home you are buying is deemed to be in a "declining market" by Fannie Mae or if the lender's real estate appraiser determines that it is located in a "declining market", you can now only borrow 90% (instead of the 95% you originally requested), thus requiring that you put an additional "5%" down. In this scenario, you would now be putting a total down payment of 10% (or $20,000) and borrowing $180,00.

This does not necessarily mean that you won't be able to get 100% financing/zero down mortgages anymore. But, it sure is a great incentive for Pinal County first time home buyers to look into Pinal County Down Payment Assistance, as the amount of assistance to eligible home buyers could be up to $20,000!

Interest Rate Trends

Mortgage Rates Rise as Federal Reserve Cuts Short-Term Rates

The average 30 year fixed rate mortgage rose to 6.21% this past week, as the Federal Reserve reduced short-term interest rates for the second time in an eight day period. Nonetheless, mortgage rates are still near a historical low, which may have contributed to a relatively strong refinance market, according to the Mortgage Bankers Association.

In Pinal County, AZ, fourth quarter 2007 home resales (sales of existing homes) picked up which may be attributable in part, to attractive mortgage rates and lower home prices.

As short-term interest rates trend downward, borrowers facing rate adjustments on their ARMS may be getting some relief. Moreover, some homeowners with the now infamous subprime loans may be getting a reprieve via rate freezes and loan modifications as an economic stimulus package is being hammered out.

Pinal County Housing Market

If you are sitting on the fence waiting for the right time to buy your first home in Pinal County, Arizona, here is some food for thought.

The Pinal County housing market for resales from 2006 to 2007 showed a decline of nearly 7.3%, while its median home price as of the fourth quarter 2007 was just $174,000 (compared to $238,500 in that of neighboring Maricopa County) keeping Pinal County an afforable place to live.

Wondering how large a home you get for that median price? The median square footage of a resale home in Pinal County as of the last quarter of 2007 was 1,735. Combine that with interest rates still hovering near historical lows, down payment assistance/interest rate reduction programs, and home buying still looks very attractive.

By using a mortgage calculator, like the one on this blog, you might discover that the monthly mortgage payment from buying a home in Pinal County would not be much more (if at all) than the cost of renting a home of similar size and age, especially when you consider the potential tax benefits of homeownership (you would want to consult your tax advisor about this).

Obviously, only you can decide whether it is the right time to buy a home for you and your family, taking into consideration other factors as well.