Private mortgage insurers appear unwilling to follow the leaders

WASHINGTON -- Could the controversial mortgage industry practice of listing hundreds of local real estate markets as "declining" -- and restricting lending through higher down payments or credit scores -- be scrapped?

The two biggest players in the home mortgage field, Fannie Mae and Freddie Mac, did precisely that on Friday.

Reversing its policy of penalizing buyers in troubled real estate markets with 5 percent higher down payments, Fannie switched to a nationally uniform policy of charging borrowers the same minimum down payments irrespective of location. A spokesman for Freddie Mac, Brad German, said his company would be "suspending" its declining markets policy indefinitely, as well.

Starting June 1, mortgage applicants who are underwritten by Fannie Mae's automated system online will qualify for 3 percent minimum down payments, wherever the property is located. Borrowers whose applications require "manual" underwriting will pay 5 percent minimum down.

Under Fannie's prior system, applicants buying houses in designated declining markets had to contribute 5 percent extra in upfront equity compared with borrowers in nondeclining areas.

Freddie Mac's policy, which never employed a list of specific areas designated as declining, relied instead on lenders to flag applications using appraisal data or home price indexes. Freddie's policy also required 5 percent higher equity contributions up front.

Critics -- ranging from the National Association of Realtors to consumer advocacy groups -- had charged that Fannie's policy served to further depress sales and real estate values in areas tainted as declining.

Critics also argued that many metropolitan markets experiencing price decreases contain submarkets performing relatively well, and do not deserve to be underwritten as high risk.

Marianne Sullivan, Fannie Mae's senior vice president for single-family credit and risk management, said the policy reversal was possible because of improvements to the company's automated underwriting system -- allowing it to "assess each loan more precisely," wherever the property is located.

That change was welcomed by national real estate and housing groups. Dick Gaylord, president of the National Association of Realtors, said the termination of a policy that "stigmatized" certain communities will "help stabilize the credit markets."

David Berenbaum, executive vice president of the National Community Reinvestment Coalition, said his group hopes the revised policies at Fannie and Freddie will prove to be "a model for others to follow."

Whether that happens anytime soon, however, is far from certain. Private mortgage insurers, who provide loss protection to lenders on loans with low down payments, have virtually all adopted highly restrictive policies affecting ZIP codes or metropolitan areas they designate as distressed or declining.

MGIC, the largest-volume insurer, recently expanded its list of distressed markets along with a series of cutbacks on specific types of low-equity loans. As of June 1, MGIC will not insure condominium unit mortgages in the entire state of Florida. It has also abandoned cash-out refinancings and loans on investment properties.

PMI Group, another major underwriter, has banned cash-out refis or investor loans in areas it judges to be distressed. Genworth Financial will not consider applications on second homes anywhere in Florida. AIG United Guaranty no longer will write insurance on condominiums in any of hundreds of ZIP codes around the country that are on its declining markets list.

Asked whether his firm might re-evaluate its declining markets restrictions in light of the abrupt changes at Fannie Mae and Freddie Mac, Terry Souers, a spokesman for Genworth Financial's mortgage insurance unit, said: "We're aware of their actions and will take them into consideration to see if additional steps are necessary."

But Michael J. Zimmerman, senior vice president-investor relations for MGIC, scotched hopes for any quick abandonment of declining markets restrictions at his company.

"We're not contemplating any changes," he said in a telephone interview. MGIC, which reported a $1.4 billion loss for the fourth quarter of 2007 and a $34 million loss for the first quarter of this year, has been hit hard by claims following foreclosures and extended delinquencies in once-booming housing markets.

What's the trend line here? Fannie Mae's and Freddie Mac's policy switch should open the door to some additional low-down-payment mortgages -- and home sales -- in local areas once tagged as declining.

But without the participation of private mortgage insurers -- who report solely to stock market investors rather than Congress -- many borrowers will likely have to turn to the Federal Housing Administration, which accepts 3 percent down, does not have declining markets restrictions, and whose loans can be purchased by Fannie Mae and Freddie Mac.

© 2008, The Washington Post