Say ‘Goodbye’ to 95% Fannie/Freddie Loans. 10% Soon to be Required.

Posted on September 1st, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

This is a follow-up on my story on August 4th entitled, ‘MGIC Reduces Mortgage Insurance LTV’s in CA, NV, AZ and FL…The Leaves Two‘.

At the time I was extremely concerned that there were only two mortgage insurance companies left who would insure to the Fannie/Freddie maximum loan-to-value ratio of 95%. Requiring an extra 5% down in the hardest hit states will take many potential buyers out of the market. This would be yet another blow to fragile markets around the nation. Fannie and Freddie are handling some 75% of all loans in the US now and even a seemingly slight tightening of guidelines can have devastating effects.

Most do not realize this but the primary targets for home purchases are now first-time home buyers and current renters. This is a very significant market challenge that has not been brought into the light as of yet. These two groups have historically been the weakest with respect to demand. These groups are not known for large down payments.  This is where many analysts go wrong. They still look at the population at large, and assume that the groups that have always been the largest buyers will continue to be so. This is an inaccurate assumption.

The reason that first-time buyers and current renters are the primary targets is simple. It is because values are down so much (35% in CA in the past 14-months) that a large percentage of present home owners are literally ’stuck’ in their home unable to sell or refinance.  The all-important ‘move-up’ buyers do not exist to any great degree any longer because affordable mortgages are gone and many can’t even afford to re-buy the home they live in today. Lastly, ’move-down’ and ‘lateral’ buyers are not out in any great numbers either because of the two reasons above.

For these reasons, despite total sales in many bubble states surging last month, ‘organic’ sales were at all-time lows. An organic sale is me selling a home to you and not part of the foreclosure stock. (Please see my July CA Home Sales Report).  Last month in CA, foreclosure-related sales made up 45% of total sales. (Please see my July CA Foreclosure Report). 

I now maintain that much of these sales are to speculators and not owner-occupied buyers, which presents an entirely different problem. Please see my report entitled: Mortgage Insurance Update – Speculators now in Control of the Purchase Market.

From my August 4th report on the Mortgage Insurance problem coming:

There could be a big problem brewing for the housing market. One that many may have not considered.  Could a large portion of the purchase market and a good chunkof Fannie and Freddie’s loan production in four states with the largest housing markets ride with two of the smaller sized mortgage insurers?

MGIC, following in the footsteps of most of their competition, reduced the allowable loan-to-value (LTV) ratios for mortgage insurance in CA, NV, AZ and FL to 90% effective today from 95%.  (Please see state restriction memo). 

If the remaining two mortgage insurers who allow over 90% in these states, Radian and RMIC, follow MGIC’s lead it would further depress their housing markets because it requires all borrowers to put more money down on purchases or bring in more money on refinances.  GE, UGI, Genworth and PMI only go to 90% and Radian and RMIC are smaller companies, so it is not inconceivable that they will not want to be the last ones on the block doing high LTV deals and soon follow suit. 

Now, as of 8/25 RMIC is out of the 95% market  in ‘declining value’ states for all intents and purposes.  Just four months ago the market heralded Fannie and Freddie for riding to the rescue and removing their ‘declining market policy’ and allowing borrowers go to go 95% again.  But the decision is and always was out of their control. It matter not if the GSE’s will buy the loan, it matters if lenders can insure the loan.

A Mr Mortgage reader and one of the ‘good-guy’ mortgage brokers out there, Aaron Terreri of Blue Coast Home Loans in CA recently sent me this break down on what RMIC will now do. The OFHEO stipulation below takes them out of most bubble states almost immediately.

Attached are RMIC’s guidelines that will be effective 8-25.  RMIC will allow up to a 95% LTV/CLTV (90% on eligible nonconforming loans > $417,000) if all of the following are true:

  • The OFHEO Index for the property’s MSA for the most recent two quarters declined by less than 2% (this one is a killer)
  • The minimum loan representative credit score is 700, and
  • The property is a single family detached primary residence, and
  • The loan is a purchase or rate/term refinance, and
  • The loan is a fully amortizing or interest only fixed rate, or ARM with a fixed rate and payment for 5 years or greater (RMIC’s minimum Interest Only term is 10 years), and
  • The maximum allowable total debt to income ratio is 45%, and
  • The loan is not one of the following ineligible loan or property types – investment properties, cash-out refinances, borrowers with nontraditional credit and construction perm loans, and
  • If the loan does not meet “of the above criteria, the loan must meet RMIC’s requirements for Declining Markets loans

Now, by default Radian is the last man standing. But Radian is one of the weakest and there is much uncertainty regarding their ability to survive. Besides that, why would this one insurer want to take all of the 95% risky business on their own. Why would banks want to take on the counter-party risk involved with doing 95% loans through one of the weakest MI companies.  

On top of it all, S&P downgraded three of the mortgage insurers last week, Radian being one of them.  My sources say that Radian will stop insuring loans over 90% by October 2008.  If this happens, say ‘goodbye’ to less than 10% down loans or less than 90% refinances for a long time. While you are doing so, say ‘goodbye’ to the ability of many in the largest target home purchaser groups, the first-time home buyer and current renter, to buy a home.

Of course, the banks could self-insure these products but that requires a significant interest rate increase, which reduces affordability and home prices as well. Always be conscious of the nasty feedback loop in which we find ourselves…higher rates equal lower home prices. Lower home prices equal increased pressure on home owners and more loan defaults and foreclosures. More foreclosures equal more supply and lower home prices. And on and on and on.

8/27 Mr Mortgage: Mortgage Insurer Downgrades – This One Could Sting

Wall Street Journal: S&P Downgrades Units of Three Mortgage Insurers

Standard & Poor’s Ratings Services downgraded its credit ratings on the units of three mortgage insurers, reflecting its expectations for increased claims and concerns about the profitability of insured mortgages originated this year.

The ratings firm, a unit of McGraw-Hill Cos., added that its projected claims for mortgages originated in 2006 and 2007 indicate that the volatility of mortgage insurers’ operating results is significantly greater than S&P assumed before the deterioration in the mortgage and housing markets.

S&P expects the 2008 vintage will generate a moderate underwriting profit for most mortgage insurers, but the significant uncertainty in the mortgage and housing markets suggests an underwriting loss is possible.

The ratings firm lowered its grades on units of Old Republic International Corp., PMI Group Inc. and Radian Group Inc., also pointing to unfavorable comparisons of the companies’ results for the first half of the year with S&P’s forecasts.

The units of PMI and Radian saw their ratings cut by two notches, to A- and BBB+, respectively, while Old Republic’s ratings got a one-notch downgrade to A+. Radian’s new rating reflects below-average credit quality. The ratings of the parent companies were also downgraded. PMI’sratings are subject to additional downgrade, withS&P noting it would likely lower its ratings another notch or affirm them with a negative outlook within 30 days. Continued.

I believe the mortgage insurers represent significant financial sector and housing market risk that the market has not factored in as of yet.  Especially when the GSE’s make up 75% of all lending and unless the purchase market expands we have no chance of finding a bottom to the market. -Best, Mr Mortgage

21 Responses to “Say ‘Goodbye’ to 95% Fannie/Freddie Loans. 10% Soon to be Required.”

  1. This new wave of bagholders will have more than the 10% down. I’d look at this as the last support to the RE market. Just like how the PPT works.

    Let’s wait and see when is the next leg down.

  2. Good! If people cannot come up with 20% of a home purchase price, they should not be buying a home. Lenders should require some buyer skin to be in the game. I am amazed at the continued sense of entitlement I see by many in this country. Owning a home is not a right, it is a priveledge.

    “dr”, you asked on the previous post if I was referring to your loan up in the Bay Area….I hope not for you! But I bet many are in the same boat as my mother and sister in law (see below). Too, the other day I signed up for a free trial of SiteX, and looked up several friends & contacts mortgage information…..ah hah!! NOW EVERYTHING ADDS UP. Eight out of the ten people I looked up have taken second and third mortgages on their homes….the leverage is unbelievable. Even seemingly conservative people are in WAY over their head. This is not going to be pretty. I have a feeling I’ll be helping to bail out my mother in law before this is all over. She’s under the very mistaken impression that Bay Area real estate only goes up…..gulp.

    “The Kool-Aid is still in full force in the Bay Area. My mother in law subsidized my sister in law’s home purchase at nearly the exact peak of the bubble (10 year Interest Only loan! at 6 times income) and when I asked her if she understood the type of loan she got her response was, “She can write off the interest.” Yes, I know that, but how is she going to afford a substantially higher payment when the loan recasts? Do you know she accepted massive interest rate risk? At a time of historically low interest rates? And she’s banking on appreciation, but two neighbors’ homes are now for sale for $100 less per square foot?? Can you say D-O-O-M-E-D?? But she apparently had no concern when I mentioned these facts. I have to figure there are many more like that besides my mother and sister in law. The Bay Area, yes, the Real Bay Area, will see declines of 50% when this all plays out. Watch and see.”

  3. Regarding the above….I wondered how my mother in law could retire so early, and travel to Taiwan and China so often. It all adds up now. She has no understanding of leverage being a two way street; she’s only benefited from it on the way up the last twenty years since buying in the Bay Area in the mid 1980s. Unfortunately she’s now going to learn that leverage is no benefit in and of itself; it cuts both ways. Ever heard of the portfolio manager from PIMCO that publicly states he is renting because it makes sense to? I chose the same path, in both regards.

  4. I seriously looked at continuing renting b4 we bought. Financially it was better but we had to jump in. At the peak. 80/20. 250k down now. And lost work. It was a very bad decision.

  5. There are probably many in your shoes, no offense meant, obviously. There’s an entire generation that does not understand that housing is merely a place to live, and, over time, barely beats inflation as an investment. If you flip a fair coin 1 million times, there will likely be some long bouts of all heads or all tails. Should someone walk up during one of those streaks, they’d likely think that the coin was biased, when in actuality it is entirely random and fair. Such is the case with many inhabitants of So Cal and the Bay Area. They’ve grown up and / or lived through a 30-40 year bullish housing bubble in California, and, therefore are under the mistaken belief that this is the norm. They will learn a tough lessen (as did Japan and more specifically Tokyo residents) as the numbers revert back to the long term mean. This isn’t really a “crash” under way to me, it is a correction to the historical norms. And it’ll look much like the Nasdaq when finished with the steep fall…..”L” shaped, with not much for many years to come. The decisions of my mother in law, sister in law, and a cousin of theirs who bought at the peak in San Ramon (sounds similar to your situation, 20% down = approx $200k, now gone likely for 20+ years) will cost them hundreds of thousands of dollars of lost returns in the long run.

  6. There have been some serious corrections inthe CA real estate market since the bull market started in the 1960’s. Not all good times really.
    From 1960 to 1970, the median price for a CA home went from about $25K to $75K. Since then it’s had two corrections, early 1980’s and early 1990’s and almost 2001. But this one is way faster and more severe. The other two were about 20% to 30% drops after 4 or 5 years of down cycle. This down turn is so fast and severe that I doubt it’s a correction, but rather a top going into a bear market for real estate that may not recover for many years.

  7. But the Bay Area was not much affected by the 1989-1996 crash that So Cal experience. At least down here many recall what happened “last time” there was a bubble. Plus I agree with you “peterb” that this time is much worse. But people who bought from about 1970 on in the Bay Area have not experience the other side of the coin. They’ve been on varying amounts of “Kool-Aid” ever since, and don’t understand that it was all a bull market — not a “normal” market that will revert back to historical norms. Many, especially up there, will be *completely* shocked. I’m thinking of a two income, two PhD wage earner family I know in San Ramon in the East Bay, and they paid $1.1 million for what will be a $500k home (I might be being generous here) when it is all said and done. And they put down 20%, so that is gone, for all intents and purposes, plus the money they could have earned on a solid performing investment over the same period. Plus, they aren’t the type to walk away and send in keys, no way. They’ll gut it out — which is absolutely the worst thing they can do financially for themselves. He used to be part of the generation up there that thought real estate only went up….but now acknowledges his home is down about 20% since he purchased it in late 2006….with no end in sight.

  8. sorry…typos….s/b “experienced” x 2

  9. I bought a condo in Cupertino in 1987 for $140K and it went down to about $110K in two years and didnt rise to $140K until about 1996. It sucked.

  10. Tom, I’m in Texas but I have a good deal of co-workers who came from California and we were talking a few weeks ago about how those that choose to “pay and stay” (continuing to make the mortgage payment in a severely declining market) are essentially acting like fools if they only have a first mortgage. All of us talking about are generally morally opposed to just walking away but when you look around your neighborhood and could see a bunch of foreclosures and short sales while your down payment and equity goes into negative equity territory, what do you do? The smart ones realize that in most states a mortgage is non-recourse debt and start figuring out when to turn in the keys – this happens in business deals (real estate, industrial plants, etc.) all the time when properties go down in value.

    I think the real disaster that is looming is the scenario of able-bodied, well-earning folks who can afford the mortgage who just decide to play chicken with the banks and stop making payments all together, knowing that it will be 9-12 months until they are kicked out so they can save up a year’s worth of mortgage payments to use for rent (or even another purchase somewhere) and get out of an underwater asset. The financial models that value the related CDO’s or underlying mortgages do not have a formula for that psychological factor that I feel could become huge as this develops.

    Why make a payment on a $800k loan when the house is worth $550k with no real hope of value recover for the next 5-10 years?

  11. Why can’t the first time homebuyer with less then 10% down just get an FHA loan?

  12. My first house cost 76,000, purchased in 1992. Not a particularly nice place, but was bigger than the house I grew up in. Saving the $15,000 for the deposit was quite a strain, but I managed and lived responsibly continuing to save and improve on the house. Got married and sold the house for $120,000, appreciation mostly due to improvements, we don’t get California increases around here. Took those profits and savings for the down payment on our newly built $250,000 house.

    We found it to be a bit far out and chose to build another home closer in. My wife and I had both more than doubled our incomes, so we went ahead and build a house that cost around $500,000, yes, we put 20% down. Our DTI was about 18 at the time, and we still felt a little uncomfortable about the payment. Built a pool and paid cash, did all the landscaping ourselves and our debt ratio now is single digit.

    My wife drives a 2004 Chevy sedan which is paid for. I purchased a new 2007 suburban on a 3 year note last year and pay extra on it each month. We max out my wife’s 401K and I max out my SEP each year. We put monthy deposits in to our children’s 529 accounts and have separate savings accounts for each in addition to our own.

    This is not meant to glorify me in any way. It is intended to give a model in which conservative people live theri lives. We are not freaked out by anything that comes in the mail, and we would be quite fine for a long time if my wife lost her job, or I did not originate any loans.

    I know a lot of you live your lives this way too. There are many others out there that do as well as it is the general model for most of my clients. The time of the 20 something buying a 500K house while driving a BMW, buying $5 coffee, $300 sunglasses, $200 jeans and eating out at $250 check restaurants nightly is over. These are luxuries, not entitlements. When more people figure this out, we will all be much better off.

  13. This looks to be a global recession in the making at this moment. Historically speaking, a bust of this proportion brings down every asset except the senior currency (US$ at this time in history) for at least a couple of years. The US$ is rising and eveything is going down for the last month or so. This trend may get stronger as the credit markets reveal more of the gigantic mess they’ve really created. Hold onto your cash for a few months more at least. IMO, this is a big one!!

  14. When will the stupid MI companies ever learn?? You should avoid insuring high LTV loans in inflated markets but should seek out and MAXIMIZE high LTV (i.e. high premium)insurance volume in price-depressed markets. Instead, two years ago, these stupid MI companies were happy to insure a 500K loan at 95% LTV on particular property but today is unwilling to insure a 95% 250K loan on the very same property. Go figure! The MI companies should have issued these LTV restrictions three years ago and LIFTED them this year.

  15. I started in the late fifties. FannieMae only bought FHA/VA loans. When MGIC loans were introduced we marveled at how it was possible to buy a home with only ten per cent down without government assistance. Our S&L got so busy we had to add staff. This cycle will help us prove that folks with enough discipline to save and manage their money deserve a home – regardless of their circumstances. Those who don’t should probably rent. Now we have to convince the politicians.

  16. Its not easy paying 10% for a house. it requires saving, and setbacks. However, if you can’t manage to save 10% you may not be financially responsible/intelligent enough to own a home. This is coming from some one who has been unsuccesfully trying to save 20,000 for a year and a half despite a 70,000 household income. I work for a Framing company in arizona and we see the financial problems all over the scale, from super high end buyers who ended up getting more than they could choose. 10% is a minimuim, I owuld have no problem with a 15 or 20% down. And while we are at it, lets make healthcare cheaper for a lower BMI. (I am 40 lbs over weight). I just think society and markets would operate better and we would all have more resources if we were not putting so much damn gease on all the squeaky wheels of this world.

  17. Tom, What is the website you are using to look up loan terms in the bay area?

  18. […] many markets will be gone as well.  Mr. Mortgage is reporting that Fannie/Freddie is moving to a 10% down payment requirement. Requiring an extra 5% down in the hardest hit states will take many potential buyers out of the […]

  19. mdporter, I was using SiteX

  20. […] Threat to Borrowers & ShareholdersWachovia, Fitch & ‘The Pay Option ARM Implosion’Say ‘Goodbye’ to 95% Fannie/Freddie Loans. 10% Soon to be Required.Mortgage Insurance Update – Speculators May Now Control Purchase MarketChina Proactively Dumping […]

  21. […] Mr. Mortgage’s Guide to the TRUTH! » Say ‘Goodbye’ to 95% Fannie/Freddie Loans. 10% Soon to b… The credit crunch is the same as tightening of the lending standards. You still can buy a home with 5% down, but soon that will be gone. “If this happens, say ‘goodbye’ to less than 10% down loans or less than 90% refinances for a long time. While you are doing so, say ‘goodbye’ to the ability of many in the largest target home purchaser groups, the first-time home buyer and current renter, to buy a home.” […]

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