The company where I work recently had an incredible real estate auction here in Las Vegas.
Over 200 bank-owned properties were sold. Thousands of home buyers attended to bid over two days. Some even had to watch the auction from a big-screen television in the next room....it was that crowded.
I was one of a handful of lenders chosen to represent the company and there were a lot of deals done that weekend.
All of the properties received bids that weekend and although not all of the offers were accepted, it really re-affirmed my belief that we are not experiencing a slow market. What we are experiencing, I believe, is an over-supply of over-priced product with more limited financing options.
The buyers are out there. They simply want deals they can afford.
So the successful buyers get their contracts, we start the loan process, and in the middle, we all get a announcement from Fannie Mae announcing a new guideline relating to "declining markets."
This new guideline officially starts tomorrow. January 15, 2008.
Many banks, including mine, are enforcing it on all loans, not just conforming Fannie loans $417,000 and under but jumbo loans as well.
It does not apply on government loans like FHA and VA.
As you may know, there is a box on the standard appraisal form called the URAR (Uniform Residential Appraisal Report) that asks the appraiser if the market is "stable," "declining" or "increasing."
If the appraiser checks the box on the appraisal report that says the market is "declining," and most of Las Vegas, my hometown, is at this point, the down payment of the selected loan program has to be increased by 5%, even if the appraisal comes in at or over value.
You can read about it here: https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/pdf/declmktsmaxfinfaq.pdf
This has been a real killer for many buyers recently and will be even bigger here shortly.
For example, let's say the loan program you want allows for 100% financing. And you need 100% financing. If the appraiser checks that box, the most financing you can now get is 95% financing.
Even if the purchase price of your home is $200,000 and the appraisal comes in much higher, let's say $245,000, if the declining market box is checked, you still have to put 5% down.
Although many lenders are looking at reconciling these kind of challenges, today the appraisal of the home means nothing compared to this. The market condition of the neighborhood and if its declining means everything.
I am doing a loan in San Ramon, CA. According to the California Association of Realtors, San Ramon, is one of the least declining areas in all of California.
In fact, while the rest of the state depreciated by nearly 10%, from last November to this November, San Ramon depreciated by less than one-third of one percent.
The purchase contract was for $1.35M. The appraisal came in at $1.37M. The declining market box was checked however. The appraiser believes that although the home is a good price and fair, the values in the neighborhood are declining. So even though the appraisal was over the purchase price, he believes the market is in decline.
Although we argued this with as much data as we could find, including the fact that average home in the neighborhood sold in less than 60 days, he won the argument. The recent sales in the neighborhood, though sold relatively quickly, had been in decline.
The borrower, who had qualified for 10% down, and the loan guidelines allow 10%, now was required to put 15% down. It almost blew up the deal.
OK, so what can you do to avoid this and not get blind-sided at the 11th hour like we all hate so much?? Be prepared early in the process!!!
1) Ask the lender what the highest loan to value your borrower can qualify for and qualify him for that program at that loan to value so you may have some cushion if necessary. Ask your lender to qualify him at the maximum allowed by the loan program.
If your borrower is putting down 10% and that's the max the loan program allows for, have a conversation with him immediately to let him know of the challenge that may be just ahead.
If they are doing 100% financing, and they need 100% or close to it, strongly consider switching to FHA and a down payment assistance program. As mentioned, government loans like FHA and VA do not have this guideline.
2) Know what loan program your client is going for and communicate with him early about this guideline. If the client is buying an investment home and the max loan guideline allows for 90% financing, prepare him that he may need to put 15% down to qualify. If the max allowed is 80%, prepare him for 25% down.
3) You are not likely going to get this "declining market" answer until the appraisal is in and that may be too late.
Therefore, meet the appraiser at the property and ask him what he thinks. I would ask him bluntly, "do you think this neighborhood is declining and will you be checking the declining market box?" If he says "yes," try and gather evidence that disproves this opinion. Many experienced appraisers will consider well-thought out evidence and comps that make your case.
2) Check and see what the most recent sale was in your neighborhood and call the agents involved to see if they had to contend with this issue. If a loan closed in there in the past few weeks, its likely they had to deal with this challenge. Information early is important.
Officially, this guideline does not start until tomorrow January 15, 2008. However, many lenders have been dealing with it for a month already.
Be prepared. Know your market and the neighborhood where you are selling and warn all of the parties early in the process.
Just because your lender says you have a loan, you are pre-qualified, and you meet loan guidelines does not mean the home you are buying and the neighborhood where it stands meets the same guidelines.
You may be penalized for buying a property in a declining neighborhood and you may be asked to bring in more money than you had planned or were already approved to.
I have been warning all of my buyers of this for weeks now. A few of them have said to me "but I am approved with 5% down, why do I now have to put down 10%?"
Its very hard to explain to them late in the process that its not them, its the property. You want to do it early.
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That is new information to me. Fortunately, I haven't run across that issue yet, but with our market I'm sure it is just a matter of time. I do agree with you, there are buyers out there.