Fannie Nixes ‘Declining Market’ LTV Restrictions

Under increasing pressure from consumer groups, Fannie Mae (FNM) said Friday that it had eliminated its prior loan-to-value restrictions in so-called “declining markets,” or those local housing markets most directly hit by the ongoing housing correction. New underwriting and downpayments standards will apply to all mortgages accepted by Fannie Mae, regardless of geographic location, eliminating the controversial policy. In December 2007, Fannie Mae adopted a “Maximum Financing in Declining Markets Policy” that restricted the loan-to-value ratios on properties in markets where home prices are declining, essentially requiring higher down payments in these markets. That policy, as reported by Housing Wire, essentially added 5 percent to the LTV requirements of existing loan programs — so a 95 percent LTV program became a 90 percent LTV program in an identified declining market, for example. Industry representatives had defended the move as prudent risk management, but consumer groups targeted the policy as so-called red-lining. Red-lining refers to decades ago, when banks once used red markers on maps to outline neighborhoods they would not lend in. Starting June 1, Fannie Mae said it will accept up to 97 percent loan-to-value ratios for conventional, conforming mortgages processed through its automated underwriting system, and 95 percent loan-to-value ratios for loans manually underwritten, in all geographic locations in the United States. The LTV requirements will apply only to single-family, primary residences; other properties will face different underwriting restrictions. “As another part of our ‘Keys to Recovery’ initiative, we are today announcing that we will be equalizing the down payment requirements for borrowers in all parts of the country, regardless of local market conditions,” Marianne Sullivan, senior vice president, single-family credit policy and risk management, said. Sullivan said Fannie Mae was able to adopt the new policy because of an improvement in the GSE’s loan-level risk assessment via its automated underwriting system, known as Desktop Underwriter. Despite the new 3 percent down payment requirement, Fannie Mae said it will continue to provide support for down payment assistance, and will continue to allow loans via its Community Seconds program, up to a maximum 105 percent combined loan-to-value ratio. Community Seconds allow a borrower to obtain a second-lien mortgage to help cover down payment and closing costs, with funding typically provided by a state or local housing agency, an employer, or a nonprofit organization. “We recognize that down payment assistance programs remain a viable tool for borrowers who can afford a mortgage long term, but might need a little help getting started,” Sullivan said. It’s unclear if sister GSE Freddie Mac (FRE) will make a similar move; calls to the company for comment were not immediately returned. For more information, visit http://www.fanniemae.com. Disclosure: The author held no positions in FNM or FRE when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.