Declining Market: Freddie Mac Issues Specific Guidance Regarding Use Of OFHEO House Price Index (HPI)

The following is an excerpt from the February 21, 2008 Freddie Mac Seller and Servicers Bulletin:

Freddie Mac expects Sellers to be aware of home price trends in their lending areas. Decisions that Mortgages are acceptable for purchase by Freddie Mac are based not only on Borrower credit reputation and capacity, but also on the adequacy of the Mortgaged Premises to secure the transaction.

Accurate property values are essential, and the fact that a property is located in a market where house prices are declining is an important indication that the value of a specific property may be declining.

In our special November 15, 2007 Bulletin we advised Sellers that we use the OFHEO House Price Index (the OFHEO Index) (available on the OFHEO web site at:  http://www.ofheo.gov/hpi_download.aspx as a tool to help identify markets where home prices may be declining.

To further assist our Seller/Servicers as they assess property value and determine whether a reduction in maximum financing amounts is necessary, we are providing specific guidance on how to use the OFHEO index when originating Mortgages for sale to Freddie Mac.

Using the OFHEO Index, subject to the Seller completing the analysis described below, Sellers should consider that home prices are declining in the Metropolitan Statistical Area (MSA) in which a property is located if either of the following is true:

• The overall decline in the OFHEO Index for the MSA for the most recent two quarters is greater than 1%; or
• There is an overall decline in the OFHEO Index for the MSA year-over-year, unless there is overall growth in the OFHEO Index for the MSA in the most recent two quarters.

For purposes of performing these calculations, Freddie Mac does not round.

Using the criteria above, home prices in the MSA in which a property is located may be declining; however, there may be smaller geographic areas within the MSA that have stable or increasing property values.

Freddie Mac expects Sellers to examine the appraisal and other information sources with care and perform a rigorous analysis to determine whether in fact the property is located in a geographic area within the MSA where home prices are declining.

If the Seller uses the OFHEO Index and the Index shows the property is located in a declining MSA, and the Seller after a rigorous analysis determines property values in the smaller geographic area in which the property is located are stable or increasing, the Seller may offer maximum financing if:

• The Seller cites specific factual evidence that clearly supports its determination of stable or increasing values, and
• The Seller retains documentation in the Mortgage file supporting its conclusion.

Regardless of the results of the OFHEO Index, if the appraisal indicates or the Seller has other evidence that the property is located in a declining market, the Seller may not offer maximum financing.

Using the OFHEO tool, a rigorous analysis of smaller geographic areas, and the appraisal, a Seller must determine whether a property is located in a declining market. When a Seller determines that a property is located in a declining market, the Seller must reduce the maximum financing amount in accordance with the requirements of Section 23.5, as modified by this Bulletin.

Freddie Mac holds the Seller accountable for the quality, integrity and accuracy of the property valuation and LTV, TLTV and HTLTV ratios for Mortgages sold to us.

FULL BULLETIN: Download Freddie_Mac_022108_Declining_Market_Bulletin.pdf