Declining Market Areas

What is a declining market area?

If you are in the market for a new home, or refinancing your current mortgage, you may have run into this term with your lender.

Fannie Mae has issued new guidelines for properties that are in declining market areas – that is, areas where the value of homes is dropping. With the current credit crisis and the slowdown in the real estate market, many areas across the nation are seeing property values fall for the first time in a long time.

If your property is in a declining market, the maximum loan to value ratio (mortgage amount divided by the value) is decreased by 5%. So, if you are purchasing a home and the maximum LTV for the program is 95%, you must now have a down payment of 10% instead of only 5%.

There are two ways that your property can be listed in a declining market area. First, Fannie Mae is maintaining a database of areas that it designates as declining market areas. If this is the case, your lender will receive a message when they run your loan through automated underwriting that your property may be in a declining market area. Second, since all real estate markets are local, your appraiser may report on the appraisal that the property is in a declining market area. Either way, the 5% reduction in maximum LTV is required.

As far as an accurate value goes for properties in these areas, many lenders are adding appraisal requirements to make sure the property is worth the value listed on the appraisal. The lender may require additional comparable closed sale to be added to the appraisal or the lender pay require the appraiser to get information on properties actively listed in your properties markets.

This is another in a long line of added obstacles to obtaining a mortgage that you should be aware of in this difficult market. Unfortunately, the time to get a mortgage can be greatly increased if the appraiser has to add this information to his appraisal report. For the time being, my branch at WestAmerica Mortgage is requiring additional information on all appraisal reports from our appraisers just in case the property is in a declining market area or in case it will be added prior to closing. So far, this has helped us meet our scheduled closing dates.

Please take a look at other articles on my blog so you are informed about the changes in the mortgage market over the past 6 – 9 months.

Short Sales Now Widespread

Since I wrote the article, “What is a Short Sale,” in June 2007, short sales have become much more common. In fact, Inside Mortgage Finance reported that approximately 20% of all home sales closed in March 2008 were short sales. They also said that the number of short sales would have been dramatically higher except for the fact that they estimate about 1 out of every 3 short sales never close.

Why is there such a huge increase in short sales?

The main reason for the increase in short sales is the downturn in the housing market. Falling home values make it more likely that people will not be able to sell their home at a high enough sales price to cover the amount they still owe on the property. When a borrower owes more on the property than the property is worth, and they do not have the assets to pay the difference, they must turn to their lenders and hope the lender will accept less than the amount they owe.

Another issue that has made the increase in short sales so dramatic is the recent trend of purchasing a home with little to no money down. These risky loans have no cushion against property depreciation, since there was no down payment to being with. As soon as values stop rising and start falling, these properties are instantly worth less than the mortgage amount.

Also at issue here are questionable appraisals. There has been a lot of attention recently being placed on appraisal standards and acceptable practices. With the increase in foreclosures, the extra scrutiny placed on the appraisals of these properties has shown that many of the original appraisals were inflated. This was not a problem as long as property values continued to increase, but is a huge problem when they decrease.

Lastly, many lenders are desperately trying to work with homeowners to stem the increase in foreclosures we have seen over the past year. They are taking extraordinary steps to avoid foreclosing on a property, and one of these steps is to accept short sales more readily. The lenders would rather take a lesser amount when the homeowners have a willing buyer, than to go through the time and expense of a foreclosure, and risking losing even more.

Short sales take time.

If you are looking for a great deal by purchasing with a short sale be prepared to wait. Normally, you negotiate with the seller directly, and it may take several days. When it is a short sale, the lender or lenders have to approve the sale. This can take weeks. Expect to wait up to a month or more just to see if the deal is accepted. If you have the ability to wait - and are willing to walk away from a property if the deal is not acceptable to the lender(s) - then you can find a great deal with short sales. Make sure you have a loan officer, Realtor, and attorney who are well-versed in short sales. There will always be more headaches with a short sale but having an experienced team will help.

Sellers should be proactive

Instead of waiting for an offer and then hoping and praying that the lender(s) will accept the offer, many sellers are contacting their lender(s) before they market their properties. By negotiating with the lender beforehand, you can lessen the time it takes, and the headaches involved in these transactions, for everyone involved. Again, make sure you already have an experienced attorney and Realtor who are well-versed in short sales, as well as the local real estate market, before you contact your lender(s).

For more information on how short sales work, see my article, “What is a Short Sale?”


Keep track of how your home value is affected by the housing downturn and increase in foreclosures and short sales. Click here for information on homes that have recently sold in your area:

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Fannie Mae Further Tightens Lending Rules

Fannie Mae announced that they will now require a minimum FICO score for loans it buys on an individual basis. The new minimum FICO score will be 580. Up until now, Fannie Mae never set a minimum credit score.

They also announced that they will increase the time required after a foreclosure before a borrower is eligible to obtain a Fannie Mae mortgage from the current 4 year period to 5 years. But, Fannie Mae said that they will allow shorter periods for borrowers who can document extenuating circumstances that have forced the foreclosure.

These changes are just the latest in a long line of changes from Fannie Mae and Freddie Mac in response to the housing downturn and mortgage crisis. These changes come on the heals of two rounds of increasing loan-level pricing adjustments announced by Fannie Mae and Freddie Mac over the past several month (See see "How much will my credit score cost me on my next mortgage?" and "Credit Score Affects Interest Rates Even More").

This again shows how much more important credit scores are becoming and how vigilant all people must be about what is on their credit reports (See “Check your credit report every year – FREE!”).

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Check your credit report every year – FREE!

In my December 2006 blog article, “FREE Credit Reports,” I talked about obtaining your free credit report directly from the main credit repositories. Now, with the changes Fannie Mae and Freddie Mac have made recently (see "How much will my credit score cost me on my next mortgage?" and "Credit Score Affects Interest Rates Even More") your credit scores are more important than ever.

The Fair and Accurate Credit Transaction Act of 2003 (FACTA) was passed by Congress to, among other things, allow consumers to monitor their own credit reports from the three main credit repositories – Equifax, Experian, and Trans Union. These free credit reports may be obtained on the internet, over the phone, and through the mail through a centralized source that was established specifically for this purpose (you cannot obtain a free credit report by contacting the credit repositories directly.)On the internet, go to http://www.annualcreditreport.com/ to get copies of all three credit reports. You can also call 877-322-8228 to obtain the credit reports by phone or you can download a form to mail in at http://www.annualcreditreport.com/cra/requestformfinal.pdf

I get offers in my e-mail all the time for free credit reports – are these the same thing?

No. Many of these offers are from companies that offer other services such as credit monitoring or credit repair. They will give you a “free” copy of your credit report if you subscribe to and pay for their service. The credit report you receive will be from that company and not directly from the main credit repositories.

When you get it at http://www.annualccreditreport.com/, you will receive information about how to correct any problems you find directly with the repositories. By law, they have to remove any information that they cannot prove is accurate - and they will let you know the steps you need to take to make the corrections.

I haven’t taken out any new credit – why should I check it?

First, you want to make sure there are not any mistakes on the credit report. If you have ever had a collection you know that some collection agencies are not very good at updating the information when the collection has been paid off. This will continue to affect your credit score. And, if you wait until you are applying for new credit such as a mortgage, it is too late – your credit scores have already suffered.

Second, you want to know what accounts your credit report shows. If there are unfamiliar accounts, you will want to investigate to make sure you are not a victim of identity theft.