Declining Markets- What you need to know

Written By: Stacey Sprain,
Certified Ambassador Loan Processor (CALP)

With recent market changes, skyrocketing foreclosure rates, and property values in decline across the country, it’s important that all originators and processors are aware of the policies that can affect their mortgage transactions. Each lender has its own policies to explain requirements for those properties that are determined to be located in declining market areas. Make sure you read up on those policies so you can “head off” potential file issues.

Fannie Mae issued bulletin 07-22 on December 5th announcing LTV restrictions for properties determined to be located in areas of market decline. FNMA also included a bulletin of frequently asked questions regarding maximum financing in declining market areas. It’s important that originators and processors read through this information. This announcement communicates that any property determined to be in a declining market area will be limited to an LTV limit 5% less the maximum allowed for the program guideline.

Fannie Mae issued a prior bulletin on July 11, 2007 advising of collateral valuation practices and declining markets. They included a bulletin of frequently asked questions that result from reading the July 11th bulletin.

The Federal Housing Administration (FHA) issued Mortgagee Letter 2007-11 which announced the FHASecure Initiative and provides Guidance on Appraisal Practices in Declining Market Areas. Refer to the last two section of the mortgagee letter for declining market information.

Freddie Mac issued a bulletin on November 15, 2007 covering new and revised post settlement deliver fees and other changes to the single family seller/servicer guide. Refer to pages 3-4 for information on declining market policies.

Veterans Affairs (VA) issued Circular 26-07-4: Valuing Properties During Periods of Declining Markets on November 30th of 2007.

In addition to these major announcements, each individual lender has its own declining market policies and requirements. Some lenders also provide specific lists of those areas they determine to be located in declining market areas and keep them up to date at their websites. If you're not able to find a particular lender's declining market requirements at their website, contact the account rep for assistance.

It's also a good idea to have a resource at hand so you can pull automated valuation models (AVMS) which can help you determine fair purchase prices and values for properties. Some credit bureaus are now offering inexpensive AVM options and third party vendors such as Interthinx and ComplianceEase also offer AVM products.

Make sure you are aware of whether or not your market area is considered to be an area where values are declining so you know how to proceed with loan structuring and appraisal practices.

About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.