Clarification on New 120-Day Freddie Mac Deadline

Update: A new seller requirement by Freddie Mac that was quietly introduced in November limits construction cycle times on new homes to 120 days, when used with the traditional one-time close construction loans. Cycle times that are longer than 120 days before the effective date of the permanent financing will require an appraisal update or completion report.

But the new rule could be problematic for conventional site builders in declining home value markets, who would find it difficult to meet the new deadline without an additional appraisal.

Newly constructed homes with settlement dates after Jan. 2, 2009 will have to conform to the new regulation, regardless of the size of the new home. The shortened construction timeline in the new regulation was adopted to limit Freddie Mac’s exposure to declining home values and appraisals in weaker markets.

If buyers or builders cannot meet that 120-day requirement, an appraisal update will be required. Typically lenders utilize a Form 442, but the revised requirement limits use to properties with no decline in value since the effective date of the appraisal. Citing current uncertainty in property values the new requirement identifies Form 442 as insufficient and instead requires an appraisal update report if market property values may have changed since the effective date of the original appraisal, or if different comparable sales are appropriate to determine current property value. If the appraisal update is lower than the original appraised value the homebuyer may incur more out-of-pocket expenses to comply with Freddie Mac requirements.

In any event, the mortgage giant’s change in policy could be a huge boon for the modular building systems industry, which has a shortened construction cycle with infrastructure improvements happening simultaneously with factory building.

“One-time close construction loans without an appraisal update will now have a 120-day cycle time. Modular producers could easily meet that kind of schedule,” says Tracy Keyser, vice president of M&T Bank’s systems-built construction division. “But it may be difficult for everyone else. The traditional two close construction loanmay again become popular with lending institutions as another alternative to assist buyers. This new rule is challenging, but still allows customers to have the option of a one-time close product. We will just have more steps to complete to comply with new requirement.”

Freddie Mac helps originate as many as 60% of all new construction-permanent loans in the U.S., with Fannie Mae, the other GSE (Government Sponsored Entity), accounting for the other 40%. Typically, whatever regulations Freddie Mac adopts, Fannie Mae follows suit. This has industry analysts concerned, especially since the weakened new housing market doesn’t need more obstacles in its path.

The full Freddie Mac bulletin is posted here If you're curious and have a knack for interpreting government-speak, download and decipher. The new construction schedule is detailed on starting on page four.
FreddieMac Bulletin 11-24-08.pdf