Declining Market Appraisals – The End of 100% Financing

More and more, I am hearing about appraisals that are coming back with notations from the appraiser that the property is in a “declining market.”

Unfortunately there is no set-in-stone definition for what is or is not a declining market.  What’s come up in my experience is either the pricing of comparables has fallen considerably or the days on market is more than 6 months.

In these situations, the amount that the buyer would be able to borrow to purchase the property is reduced by 5% from the maximum allowed for that mortgage product.  For instance, if the buyer was doing a 100% loan with MI, the buyer would only be permitted to do a 95% loan on that property.

Given that the real estate market is slowing dramatically in almost all markets, the likelihood of this issue growing is almost a certainty.

To make matters worse, Fannie Mae has released new rules that mean loan officers that use Desktop Underwriter (DU) for their approvals may see the computer kick back a “declining market” flag without any specific reasoning behind it other than the census tract, city, and/or zip code of the property is an area of declining prices or an area difficult to assess home values.  While this can be overridden by the appraiser & lender under certain guidelines, this automatic blacklisting of properties will invariably cause headaches for everyone involved and likely be difficult to change.

Lenders need to look out for their best interests and the industry as a whole needs to look out for consumer’s best interests but this can also end up further stifling the housing market and, especially in the case of a property being flagged by Desktop Underwriter, could bring unnecessary restraint into the market.

The market data used by Fannie Mae or an appraiser is already old by the time that they get it, so this lag in market data will mean a prolonging of market restrictions beyond the end of the weak market itself.  Further, since Fannie Mae is not giving specific information as to how they are going to determine “declining markets,” it makes it difficult for there to be any dialog as to whether that classification is warranted or not.

In the two cases where “declining market” has specifically affected my clients, the pricing on the homes in question had fallen dramatically, 10%+, in the last two years and these homes were now clearly great values compared to comparables for sale and that had sold.

So here I have buyers that have an opportunity to purchase homes at prices that are considerably more affordable than a couple years ago but they must now find a way to come up with the 5% down payment.  My buyers have been able to do that, but there are many buyers who would not.

With the potential of losing much of what remains of 100% financing, we’re likely to see a further erosion of buyer activity.  This diminished activity will prolong an already difficult phase of our current market.

There is a potential savior: FHA.  The FHA program doesn’t specifically require the additional down payment if the buyer is well within qualifying guidelines, so buyers with solid credit histories that are not trying to max their qualifying amounts can use the FHA program to limit their down payments to only 3%.  With the proposals going through Congress discussing passage of a reduced 1.5% down payment requirement, FHA may finally be able to play a more active role in the real estate market… something it hasn’t done for many years.