Zero-down loans drying up: Mortgage giants trim lending maximum for Twin Cities

HOMEBUYERS BEWARE, Jan 04, 2008 (Pioneer Press - McClatchy-Tribune Information Services via COMTEX) -- FRE | charts | news | PowerRating -- the noose is tightening on zero-down-payment home loans in the Twin Cities.

With portions of the area now flagged as a declining market, lenders are curbing 100 percent financing to adhere to lending rules set by mortgage-buying giants Freddie Mac and Fannie Mae.

Housing professionals say it's too early to gauge how the pullback will affect sales, but acknowledge it spells trouble for anyone shopping around with little or no cash.

Low- or zero-down-payment home loans have been a key tool for getting low- and moderate-income families into their first house, although such loans also have been fingered as a factor in the rising rate of foreclosures. Now if first-time buyers can't pony up a down payment, they may need to polish their credit score or show they have two months' payments already stashed in the bank to get a loan.

"It's a change in the market that we didn't have a year ago," said Mark Teteris, CEO of Bloomington-based Lakeland Mortgage. "We've seen transactions not come together because (applicants) did not have the down payment."

Specifically, Freddie Mac and Fannie Mae have said they are lowering their maximum financing in declining markets by percentage points. With home prices declining across the Twin Cities, that's prompting the two government-sponsored agencies to look at loans from this normally super-stable area differently. A mortgage that previously would have been funded at 100 percent of the home's value would

now be funded at 95 percent.

"It's an old policy but it's starting to bite now that home prices are in decline in some areas," said Brad German, spokesman for McLean, Va.-based Freddie Mac.

Fannie Mae and Freddie Mac buy the bulk of U.S. mortgages and so have great influence on how home loans are structured.

SunTrust Mortgage, a leading wholesaler in Atlanta, sent a memo Dec. 31 to at least one Twin Cities mortgage broker saying that effective immediately they must deduct 5 percent from the allowable ratios on all loans secured by Minnesota properties with loan-to-value ratios above 80 percent. SunTrust declined to discuss the policy change.

Lenders admit they now are more reluctant to approve zero-down loans for fear that they will get stuck with them. Dan Arrigoni, president of U.S. Bank Home Mortgage, estimates that about 40 percent of borrowers who qualified for no-money-down loans a year ago would get them today.

"Now most of Fannie and Freddie's underwriting is automated," Arrigoni said. "If it pops out to be a reject or a caution, that's where both agencies say 'Well, use your judgment.' But if we use our judgment and they don't like it, we have to buy it back."

Of course, determining that a property is in a declining market is not always a straightforward process.

It's unclear, for instance, whether Fannie and Freddie have flagged the entire 13-county Twin Cities metro area as declining and subject to stricter guidelines, or if they are just looking at pockets within the area. Locally, price changes have varied greatly city by city in the Twin Cities area, and even by neighborhood.

The Twin Cities 13-county area registered small declines in the past two quarters on the index published by the Office of Federal Housing Enterprise Oversight, the watchdog of Fannie Mae and Freddie Mac. The index dropped about 1 percent in the second quarter and 1.2 percent in the third quarter -- the first declines in years.

A Fannie Mae spokeswoman said the agency relies on the OFHEO house-price index to gauge declining markets, but said her agency also relies on local appraisers and lenders to determine whether a house is in a declining area. According to Alan Hummel, senior vice president and chief appraiser at Little Canada-based Forsythe Appraisals, appraisers may define neighborhoods differently than homeowners. They may look at school districts as a market area, or lump together neighborhoods with similar characteristics.

To be sure, the 100 percent mortgage isn't dead. The U.S. Department of Veterans Affairs continues to make no-money-down home loans to veterans. U.S. Bank Home Mortgage still makes them in the Twin Cities, but the home in question must be in a neighborhood that an appraiser determines is not declining, and borrowers probably will need to show a higher credit score and cash reserves large enough to cover a few months of mortgage payments.

And there still are a slew of nonprofits partnering with government agencies to help first-time homebuyers with down payments.

While the dwindling availability of zero-down mortgages may cause some short-term pain, some lenders say the trend will be positive in the long run. Many of the homeowners that ended up in foreclosure financed their homes with zero-down products.

"To allow people to purchase homes with little or nothing into it or no cash reserves after the closing ... we were bordering lunacy over the last few years," said Jim Miley, president of residential real estate for Bremer Financial Corp. in St. Paul. "To have a little skin in the game is not a bad thing."

Jennifer Bjorhus can be reached at jbjorhus@pioneerpress.com or 651-228-2146. Nicole Garrison-Sprenger can be reached at 651-228-5580 or ngarrisonsprenger@pioneerpress.com.

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