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!