In a move that symbolizes the sharp difference between today's real estate market and that of the two prior decades, a major lender plans to alter its investment policies for home loans that are more than 1 year old.
Effective Dec. 1, Freddie Mac--the Federal Home Loan Mortgage Corp.--no longer will purchase so-called "seasoned" mortgages through its regular investment program. Instead it will buy such loans only on a negotiated basis, allowing it to better assess the new risk factors that may accompany mortgages more than 1 year old that haven't been refinanced.
Freddie Mac pumps billions of dollars into the home-loan market nationwide annually by purchasing mortgages originated by local lenders. Local mortgage companies and banks then use the money to make additional loans.
The change in policy represents an about-face for the giant corporation and the lending industry as a whole. It also carries an ironic, implicit message for homeowners:
If your fixed-rate loan was closed two or more years ago and you haven't refinanced, the mortgage capital market now wonders why you haven't sought to cut your interest rate. Could there be reasons that might prove troubling, such as declining equity in your home or income or credit problems on your part?
Michael K. Stamper, Freddie Mac's executive vice president for risk management, confirmed in an interview that the new policy amounts to a reversal of a long-standing tradition.
"Historically," he said, "people have seen (mortgages closed more than a year before) as better quality than new loans." That's because an investor like Freddie Mac would be able to examine two or three years' worth of payment history by the homeowners and could assume that the borrower's equity position in the house had increased or at least held steady over time.
The market of the 1990s has thrown the traditional assumptions out the window, however. Interest rates have plunged to 25-year lows. Average appreciation rates in home values are below the rate of inflation in many markets. And large parts of the country, particularly Southern California and the Northeast, have continued to experience net declines in resale prices.
One national index that tracks the resale values of thousands of individual properties in large markets, for example, found that on repeat-sales of homes in Los Angeles County, prices have dropped between 6% and 12% in the past year alone. Houses in higher-cost areas of Los Angeles, according to the index, have dropped by 23% in resale value from their peak several years ago.
From a mortgage industry perspective, said Stamper, declines in resale values mean potentially higher risks for the lender or mortgage holder. What had been a $200,000 house four years ago with a $180,000 new loan, for example, may now be a $175,000 house with a loan balance around $175,000. The owner's $20,000 in equity in the property has evaporated. The lender's risk of foreclosure--and loss--is far higher on that mortgage today than it was when originally closed.
Similar jumps in risk on loans 2- to 5-years-old have occurred in areas of the country experiencing higher-than-average layoffs, plant relocations and business closings. Although homeowners in economically pinched markets may have continued to pay their monthly mortgage bills regularly, they may no longer be the excellent credit risks they were when they went to closing.
A fresh check with credit bureaus could well turn up a series of late or non-payments on credit cards and other installment debts over the past year or two. To a mortgage lender that changes the entire equation: The borrowers no longer are top quality. The loan no longer is investment grade. It may, to the contrary, be a time bomb.
Ironically, the tip-off to jumps in risk like this, says Stamper, may be the fact that the homeowners are carrying a late 1980s or early 1990s mortgage rate well above current rates--anywhere from 9% up--but have not refinanced.
Although "plenty of people (with seasoned loans) have good reasons why they haven't refinanced (in the past two years)," he says, the nagging question remains: Why haven't the homeowners lowered their rate? Is it possible they know that they no longer qualify on income or credit grounds for a standard mortgage even at today's prevailing lower rates? Do they suspect that their shrunken equity position might drastically cut the loan size they would get at the refinance table?
Freddie Mac's new policy, while emblematic of the major changes that have occurred in the mortgage market, will not penalize home owners with loans more than 1 year old--even if their home equity stake or credit worthiness has declined.
Nor will it mean that local lenders won't be able to sell their loans to Freddie Mac. Rather, the new procedures as of Dec. 1 are likely to require local lenders to provide Freddie Mac with additional information on current home values and borrowers' recent credit profiles.
Distributed by the Washington Post Writers Group.