The D Market: Fannie Mae's new designation

By: Jessica White/DC Columnist

Posted: 1/29/08

I am deviating from the normal question and answer format to write about a new development in the real estate market that will have a tremendous impact on innumerable buyers and sellers: the "D market."

Fannie Mae, the mortgage industry giant who is ultimately responsible for much of the money that funds home purchase loans, implemented a policy of requiring that buyers make a 5% larger deposit on their home than the original loan program guidelines called for if the property is designated as being in a "declining market." The catch - as if having to put an additional 5% down already isn't a catch - is that there is conflicting information at this time about how areas are determined to be declining markets. No list of areas, counties, zip codes, regions, streets, etc., has been released.

The buyer may only learn of the property's declining market designation when the loan, with the property address, is run through Fannie Mae's automated underwriting system. The buyer may also learn of the "declining market" designation when the appraisal is done if the appraiser finds that the property is in a declining market. In effect, the work a lender does when it "pre-approves" a borrower based on the buyer's income, assets and credit score is meaningless without knowing the property's physical address to determine if it is in a "D market".

The ramifications of this new designation for deals that were in the works and got caught in the newly implemented "D market" maelstrom is that buyers and sellers have spent a few harrowing weeks of watching deals fall apart, often after the buyer has spent several hundred dollars on the inspection and appraisal, given notice to vacate his or her apartment, lined up the moving truck, packed the boxes. And of course the seller, too, has paid for an appraisal and inspection for his or her next property, lined up the moving truck and packed the boxes as well.

For the typical first-time home buyer who wants to do a very popular 100% financed loan through Fannie Mae, this "D market" designation means that the buyer will have to come up with 5% to put down on the property. For a lucky few, this could be as simple as a call to the Bank of Mom and Dad. For most buyers, however, the Bank of Mom and Dad is closed or in need of a loan itself.

If the buyer simply cannot come up with a down payment, and the loan amount is less than the Federal Housing Administration's loan limit ($362,790 in this area), the buyer may be able to buy the property using an FHA insured loan in conjunction with a down payment assistance program. Essentially, the down payment assistance program will enable the seller to legally gift up to 5% of the home's purchase price to cover the down payment and closing costs. And notably, the FHA system is not dependent on Fannie Mae's automated underwriting system and therefore the "declining market" designation does not come into play.

Another possible solution is that the same buyer can go through Fannie Mae's competitor, Freddie Mac. As of now, simply switching from a Fannie Mae to a Freddie Mac loan product may be enough to save a deal, assuming that the appraiser does not find that the property is located in a declining market and that the appraisal meets other qualifications. But who knows how long it will be until Freddie Mac catches up to its big sister, Fannie Mae.

I do not want to end on a pessimistic, negative note. I will say that we can expect to see a lot written about this subject in the coming weeks and months. Interest rates are at incredible lows, which will hopefully entice buyers into the market. Buying a property will just require more upfront work from the real estate agents and lenders until the process of determining if a property is located in a "D market" is demystified.

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage consultant with Tenacity Mortgage. Call or email her to discuss your home purchase or refinancing needs, including FHA loans. She can be reached at 202-607-4449 or Jessica@msmortgagemaven.com. You can also apply online at www.msmortgagemaven.com.