Preventing Future Foreclosures

In the past few months, the mortgage business has wrestled with the concept known as a declining market.   The latest example of how the mortgage pendulum has swung from one extreme to another, it has created a vacuum of choices for the low down payment borrower.   Essentially, declining markets are applicable to wide swaths of real estate characterized as high risk due to recent price drops in the overall market.   Subsequently, restrictions are placed on particular loan scenarios.   Excessive greed created a great deal of speculation, but now fear dictates actions.   Either way, allowing emotions to make a sound financial decision is irrational and unwarranted.  

A simple example of how the declining market affects us all, conventional lenders require an additional 5% down payment on loans where the borrower intended to put 5% down or less.   Thus, a loan program that was 100% financing becomes a 95% loan (to value) and 95% financing becomes a 90% loan.  

The declining market label can be applied by appraisers and mortgage insurance companies.   In fact, if anyone looks up a subject property address and deems it a declining market, it changes the loan scenario.   Sensibility has returned and lenders want borrowers to have their own funds locked into a home, just as it was years ago.  

Mortgage insurance companies have traditionally provided risk reduction to the lender who underwrites a loan when equity is below 20%.   Mortgage insurance providers have jumped on the bandwagon, effectively eliminating entire categories for borrowers seeking conventional (Fannie Mae and Freddie Mac) loans with less than 10% down for most purchases, investments, some second home markets such as Florida, and virtually all refinances.   Borrowers will be giving FHA and VA loans a second look.   They have no declining market policy and still allow minimum equity interest in an owner-occupied residence.   Hooray for the FHA!  

A declining market is akin to a broad paint stroke.   Some neighborhoods have seen modest price increases within a county or metro area that gets tagged as a declining market.   So, all real estate within these areas becomes part of a declining market.   It may seem unfair in the short run, but given time, home prices will return to a historical rise in  the price trend  of 3 to 4% year to year.   With property values steadying and mortgage rates quite low, the market is destined to rebound.  

© 2008 Michael S. Amers

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