Declining Markets and Metropolitan Statistical Areas

Imagine the surprise of many home sellers when they become aware that Fannie Mae, Freddie Mac and most of the major lender guarantors have identified their Metropolitan Statistical Area (MSA) as a declining market. Talk about a kick in the head. Like many across this country, they first had to come to terms with the fact their homes are declining in value. Now, they also must face the situation where many potential home buyers will be penalized if they attempt to buy their homes with conventional mortgage financing.

So, just exactly how do these metropolitan statistical areas get these "declining market" designations? We thought you might find a review of the situation helpful.

Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSEs) and they rely on statistical data gathered by the Office of Federal Housing Enterprise Oversight (OFHEO) which collects and publishes quarterly rankings based on the House Price Index (HPI). The HPI is a broad measure of the movement of single-family property prices on the national, state, and metropolitan level. The HPI measures average price changes in repeat sales and refinancings on the same properties on a weighted basis. This information is obtained by reviewing repeat mortgage transactions on single-family properties whose mortgages have been purchased or securitized by the GSEs.

Declining markets are identified when two quarterly HPI statistical reports show a decline in the rate of appreciation. The key point to understand is, a market area report may show appreciation in the current quarter, but the rate of appreciation is declining when measured on a quarter over quarter review. According to Freddie Mac, "market declines exceeding 1% for the most recent two quarters represent a declining market." Fannie Mae simply states, “a declining market is one in which home prices are currently declining, no matter what the percentage decline.” In addition to HPI data, FannieMae and Freddie Mac also rely heavily on market watch research conducted by several major lender guarantors, AIG United Guaranty, Genworth Financial Inc., and Republic Mortgage to name just a few. These are the Private Mortgage Insurance (PMI) companies that provide mortgage coverage for buyers putting less than 20% down. In actuality, they hold even more control over the "declining market" situation than the GSEs do, because without them on board, no one could get a conventional mortgage without a substantial 20% down payment.

Since most loan originations are submitted to the secondary mortgage market for securitization, the submissions must meet the guidelines as defined by the GSEs. Thus,it has become very common in today's marketplace for loan originators to receive the following type of notice when they submit their clients' loans to the GSEs:

"The subject property has been identified as being located in either an area of declining home prices or in an area where it may be difficult to assess home values. The lender should carefully review the appraisal to ensure that the appraiser has appropriately analyzed property value trends and overall market conditions to arrive at the value provided. The lender should request additional support from the appraiser if it determines that the appraisal does not accurately reflect current market conditions."

Under these circumstances, it then falls to the appraiser to either accept the GSEs designation of a declining market by checking the declining market box on the appraisal report or give their opinion of market trends based upon recognized techniques and explain their reasoning as to why they feel the property is in a stable or appreciating market. It then becomes a crap shoot as to whether the appraiser can provide enough documentation to validate their opinion to the underwriters at the GSE or not. If not, then the potential buyer may have to come up with a larger down payment in order to purchase the seller's property.

So, there you have it. And, as we like to say, "welcome to the world of mortgage financing in 2008."

Metro Mortgage Company is a federally regulated Mortgage Banker specializing in Conventional, Jumbo and FHA/VA mortgage loans throughout Florida. Call us today at 888-617-3674.

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