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By Jason Kotar

RISMEDIA, Feb. 8, 2008–Today’s lending market is fascinating. It’s volatile, ever-changing, hard to keep up with, and even harder to understand.

Recently, I wrote an article regarding the renewed importance of an appraisal in today’s real estate environment with declining home values. This is only part of the lending puzzle.

At Fannie Mae’s direction, lenders have instituted a “soft market policy” (usually Counties) according to a risk assessment of whether that area is declining or stable from a valuation standpoint. One lender uses a system of five categories; another, a three-category system, with the highest number equating to the highest risk. Different lenders have different criteria for addressing soft markets.

The impact of the rating is that the highest risk markets can have (in some cases will have) their loan-to-value (LTV) ratio reduced. The minimum LTV reduction in the highest risk markets that we have determined, among the lenders we have surveyed, is 5%. Under these circumstances, a loan program allowing for a 95% LTV, will now have a new maximum of 90% LTV. This effectively increases the down payment requirement by 5%. On a $300,000 loan, that increases the down payment requirement by $15,000. The maximum LTV reduction that we have found is 10% LTV. FHA and VA loans are excluded from the reduction of LTV policy. However, popular first-time homebuyer programs offering 100% financing could be subject to a 5% reduction in LTV if they are located in a “high risk” market.

In my previous article, I mentioned that the appraisal criteria lenders require appraisers to follow, is of critical importance in getting the loan approved. Not only have lenders implemented more stringent requirements for appraisers to meet in establishing the value of a specific property, they have compounded the issue by setting risk criteria which could have the effect on further diluting property values.

Not all markets are categorized as soft and not all lenders categorize markets the same. Your mortgage professional has access to this information as well as lists of approved appraisers for various lenders. Going forward, the working relationship between the real estate agent, the appraiser and the mortgage broker/lender is more important than ever.

Jason Kotar is president of Diversity Lending Group, Inc.

For more information, visit

To read Kotar’s article “The Importance of Appraisals in a Declining Market,” click here.