Loan woes eroding confidence

State's slumping housing market could get worse before it gets better

The turmoil surrounding Fannie Mae and Freddie Mac is creating more anxiety and confusion in a Massachusetts housing market already reeling from slumping sales, surging foreclosures, and ever-tightening restrictions on home loans.

Real estate industry professionals said the US government plan to prop up the mortgage giants, while crucial to restoring confidence in the market, will also perpetuate a self-defeating cycle characterized by jittery creditors, tougher scrutiny of buyers, and fewer sales overall.

"When Uncle Sam has to offer a bailout, consumer confidence takes another gigantic hit," said Alain Valles, president of the Massachusetts Mortgage Association. "This kind of fear creates a fight-or-flight response, and people are flying away from buying right now."

That uncertainty may already be undermining pending deals.

Judy Moore, a broker with RE/MAX Landmark Realty, said a closing on a home sale she brokered was abruptly delayed Thursday when the lender raised new questions about the financing, even though the prospective buyer had offered a 50 percent down payment and had near-perfect credit. She said it's an example of the extreme jitters in the mortgage market, now being made worse by Fannie's and Freddie's troubles.

"Red flags are popping up for reasons that don't make a lot of sense," said Moore, whose agency is in Lexington. "There doesn't seem to be any rhyme or reason to it."

The troubles with Fannie Mae and Freddie Mac are particularly worrisome because the two companies essentially form the financial foundation of the nation's housing market. When investors lose confidence in the firms, their cost of doing business rises, exerting upward pressure on fees and interest rates charged to home buyers.

"When there is turmoil with Fannie and Freddie, it trickles down to the rest of us. There is no way around that," said Vince Valvo group publisher of Warren Group, which tracks home sales. "Those two firms make the market, so their continued health is an absolute necessity to ensure we have a functioning real estate market."

Banking industry officials said the government's plan to extend up to $300 billion to the companies through investments and loans should dispel any notion that the firms are vulnerable to a collapse. Still, the continual drumbeat of bad news about the mortgage industry is fueling fears of an unknown disaster on the horizon, and investors are not waiting around to get trapped in the financial wreckage.

In Massachusetts, where the housing meltdown has hit particularly hard, that means a comeback in home sales could be delayed indefinitely. In May, sales of single-family homes were down 13 percent from the same month in 2007, contributing to one of the slowest seasons in recent history.

Valvo said preliminary data from June indicate the downward trend is continuing.

"We're still losing, and that's absolutely what's going to come out in the next round of numbers," he said. "We are not anywhere near the bottom of this market yet."

The slowdown also contributes to broader economic malaise by hitting businesses that profit from housing sales. Landscapers, lawyers, and movers are but a few of the score of industries that rely on real estate transactions for at least part of their revenue.

Even before Fannie's and Freddie's recent troubles, mortgage professionals said lenders were reacting strongly to the constant drip of financial losses and job cuts; they increasingly demand multiple assurances that buyers are not in danger of unemployment. That means even ideal buyers must strictly adhere to paperwork deadlines and precise details where they previously enjoyed leeway.

"If I could give one piece of advice to buyers, it would be to get your documentation to the lender right on time, even if you have an excellent credit background and good income," said Moore. "Any delay in the materials could delay the closing."

In addition, jittery lenders are demanding higher and higher down payments, placing a particularly onerous burden on first-time home buyers who are struggling to save amid surging prices for food and fuel.

Despite the economic doom and gloom, some industry leaders say there is reason for optimism, as regulatory reforms begin to restore accountability to mortgage financing. The Federal Reserve yesterday adopted rules to bar lenders from making loans without proof of the borrower's income and ability to keep up payments, among other changes.

"This will bring us back to a simpler time in home financing where many people believed we should have been all along," Peter Milewski, director of the mortgage insurance fund for MassHousing, the state's affordable housing bank. "We'll be giving a lot more thought to who we put in homes and how we put them in homes."

Casey Ross can be reached at cross@globe.com.