What does it mean? What will it Cost?
As the real estate and mortgage markets continue to recover we are seeing more and more restrictions on lending to try and right the ship. One monster that started to surface way back in July of 2007 was the "Declining Markets" guidance sent out by FNMA. In short FNMA began to notice in their massive data base that there are areas of the country that are seeing consistent declines in market value. While it is acceptable to deliver mortgage products to FNMA that are secured by properties in declining markets the rules have started to restrict which products and Loan-to-value ratios may be acceptable. While FNMA says there is no standard industry definition of what constitutes a declining market they have not hesitated to add a new message in their Desktop Underwriter automated system. The new finding essentially states that the property is, according to FNMA, in a declining market area and it may be difficult to assess home values. So what does this all mean?
Well, if your lender receives this message when underwriting your mortgage loan and you are not putting any money down you will be penalized. The lender must immediately lower the highest acceptable loan-to-value ratio by 5%. So, your 100% loan just became a 95% loan no matter how you slice it. If this is a refinance transaction you may have some wiggle room to find a solution. If this is a purchase loan you may be out of luck when looking at conventional financing. One action that you can take to avoid the surprise of this scary but protective rule is to have your lender run your file through the automated system before even making an offer. This way you will know up front if you will be dealing with this issue on this property regardless of sale price.In the past the appraiser had a little lead way in determining value. He may have been able to go slightly out of area or scope of time. Not any more. While the following are always considered best practice they are now considered ONLY practice.
These guidelines are not intended to be all inclusive and may differ depending on the lender. They should be viewed as the minimum requirements used to set the market value by using data for comparable properties.
- Must be within a three to six month period, with similar features such as square footage.
- Must provide days on market for the subject property and comparable sales used.
- Must be within close proximity of the subject property, looking at neighborhood character as well (urban, suburban or rural).
- Must be within a one mile radius of the subject.
- Must provide one current listing or pending sale from the Multiple Listing Service to help support value.
If any of these guidelines cannot be positively addressed or supported in the appraisal, the appraiser needs to provide a detailed written explanation of the circumstances.
There are a few other solutions. For example, FHA and VA do not have an issue with properties located in declining market areas. They leave the determination to those is the field that they trust, the lender and the appraiser. The bottom line is that while this rule may cause some headaches, especially in areas where whole counties have been determined to be in declining markets, but it does not mean that houses can not be sold. It does mean that you need to make sure your lender is up to speed on these changes to assure a smooth transaction.