MICHAEL SINCLAIR
‘A big deal’

Changes under way at Fannie Mae and Freddie Mac inspired by the housing market decline will have a mixed effect on the Bay State, local lenders and advocates say, helping borrowers with better credit but hindering those who want to buy in lower-income areas.

Higher down payment minimums for declining markets, which Fannie Mae decided on Jan. 15 to reinstate after a two-year hiatus, and which Freddie Mac has had in place since 2000, require borrowers wanting to purchase or refinance properties in declining markets to come up with down payments 5 percentage points higher than those who borrow elsewhere. Typically, that would mean a minimum 10 percent down payment rather than 5 percent down.

The two government-sponsored enterprises, which purchase the majority of mortgage loans in the nation, have not defined “declining market” other than to point lenders to data such as that produced by the National Association of Realtors. Freddie Mac allows local lenders and appraisers to determine which markets are declining, regionally and locally, according to spokesman Brad German.

Ryan Racicot, a production coordinator at Direct Finance Corp. in Hanover, said borrowers affected by the declining market policy represent about 25 percent of his company’s business.

Direct Finance makes most of its loans in Plymouth County, one of the hardest-hit areas in Massachusetts, which itself has seen median home prices decline over a two-year period, from $345,000 in 2005 to $330,000 in 2007, according to The Warren Group, Banker & Tradesman’s parent company. When including foreclosure deeds in the calculation, the median home price in the Bay State last year was $310,000.

Loan Limits

In an effort to jump-start the same declining market, the U.S. House, meanwhile, passed an economic stimulus package on Jan. 29 that would increase Fannie and Freddie’s loan purchase limits through the end of 2008, thus improving credit opportunities for borrowers who already have excellent credit.

It’s not clear what loan limit the House proposal will allow, but Michael Sinclair, vice president for residential lending at Hingham Institution for Savings, is hoping for the higher of two proposed in the bill.

The House proposal could allow loans of up to 175 percent of the current $417,000 limit, or $729,750.

“That would be a big deal in Hingham,” said Michael Sinclair, vice president for retail lending at Hingham Institution for Savings. According to The Warren Group, the median sales price of a single-family home in Hingham in 2007 was $605,000.

The bank is working on an advertising campaign aimed at potential refinance customers who normally would have to pay a premium for a jumbo loan but could benefit from reduced interest rates if Fannie and Freddie are allowed to purchase larger mortgages, he said.

But Massachusetts Bankers Association Federal and Legislative Policy Director Jon Skarin predicted that a second upper limit suggested in the package – a loan amount of 125 percent of the area’s median home price – is more likely to pass. Under that scenario, based on a 2007 median home price of about $330,000 in Massachusetts, the allowed limit would not increase beyond the current $417,000 cap.

Thomas Callahan, executive director of the Massachusetts Affordable Housing Alliance, said Fannie and Freddie’s declining market policies will have the opposite of the intended effect.

“There’s no better way to ensure a declining market” than to increase down payment requirements as the Fannie and Freddie policies do, Callahan said. Penalizing homebuyers in struggling markets will put further strain on sales and prices in areas that already are struggling, he said.

“They’re [increased down payment requirements in declining markets] like kicking a community while it’s down,” said Clark Ziegler, executive director of the Massachusetts Housing Partnership.

Ziegler said the policy would force borrowers of his quasi-public agency’s popular, affordable SoftSecond mortgage loan product to come up with an 8 percent down payment, instead of 3 percent. That would hurt, not help, the housing market in communities where low-income borrowers are more likely to buy, he said.

“The problem with the declining market rule is that it means that the areas hard-hit by foreclosures are being hit again, because fewer new owners can get in,” Ziegler said.

Fannie Mae, a major purchaser of SoftSecond loans, approved the 3 percent down payment when MHP lowered it from 5 percent about seven years ago, according to Ziegler. His agency is trying to convince Fannie to offer a waiver for SoftSecond borrowers.

Freddie Mac spokesman German said his company has to implement its declining market policy to decrease risk. Other investors either went out of business or have vastly curtailed lending activity in the past year due to risk-related factors, he noted, but Freddie Mac’s lending has increased.

Freddie Mac purchased a total of $85 billion in loans nationwide last March, and $97 billion last December, German said, citing Inside Mortgage Finance. In contrast, purchasers of riskier subprime, alt-A and jumbo loans bought a total of $105 billion in loans last March and just $12 billion in December.

But Ziegler said SoftSecond loan guarantors, including Fannie Mae, face minimal risk since they back only 77 percent of the loan. Local banks – which keep the second, state-subsidized 20 percent mortgage in portfolio – are much more exposed, he said.

Alain Valles, president of Direct Finance Corp., agreed that the declining market policy will make things “terrible” for borrowers who don’t have high credit scores and a big down payment.

But for those who do, he said, things couldn’t be better.

While the declining market policies are firmly in place, the question of whether Fannie and Freddie’s loan limits will increase, and to what level, remains an open one. The U.S. Senate last week passed an economic stimulus package, separate from the House plan, which does not address loan limits.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight, which regulates Fannie and Freddie, has publicly opposed a loan limit increase, saying it would be too risky unless his office got more “safety and soundness” regulatory tools.