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Mortgage Corner

April 22, 2008

Mortgage Market

Over the past 10 years, the mortgage market expanded rapidly as lenders and investors flooded the market with cheap and plentiful money looking for a higher rate of return. Consumers benefited from the continuous flow of complex mortgage offerings and somewhat aggressive lending standards. The entire financial community submersed themselves in the mortgage market and mortgages bundled into securities doubled from 42% to just over 80%.

Then, the real estate market cooled off. Problems began to appear in the subprime market as mortgage-backed securities were downgraded and certain institutions were forced to sell their holdings. Money dried up. Over 300 lenders were caught in the aftermath and discontinued operations. The remaining lenders continue to keep large pipelines flowing with high quality loan products.

Government agencies and politicians are creating a giant wave of regulatory statutes in attempts to stabilize the system. Credit card problems, commercial loan calls, and a second wave of refinance loans hitting the market mid-summer will likely continue to feed the crisis.

When foreclosures stabilize and home values begin to increase, investors for mortgage-backed securities will re-enter the market. Until that time, Fannie Mae, Freddie Mac, FHA and VA have stepped up efforts and are aggressively buying good quality loans where there is a 720 credit score and a loan-to-value is below 70%.

What has changed?

For the first time, we are hearing terms like liquidity, mortgage-backed securities, and secondary markets in the main stream media. However, many of the reports fail to fully explain their correlation to the current crisis or the consumer impact. Following summarizes the actual changes that have recently occurred that directly affect you as a mortgage consumer.

1. Conventional loans from Fannie Mae and Freddie Mac have significantly increased rates for consumers with credit scores between 600 and 700. There are also significant rate adjustments for cash-out loans and low credit scores.
2. Most conventional lenders will not accept loans with credit scores below 600.
3. The majority of the country is considered a declining market and lenders are requiring an appraisal to include four comparable sales within a one-mile radius and the last three months.
4. Jumbo loan products are priced well above conventional rates.
5. No income verification loans (or stated loans) have virtually disappeared.
6. Mortgage insurance companies have caused lenders to cease all 100% purchase loans. Most lenders now require 5% down and a minimum 680 credit score.
7. Second mortgages and equity lines have been drastically reduced to 90% of home value.
8. Subprime lenders have all but vanished – leaving consumers with credit scores below 600 very few viable options.
9. The President’s stimulus package raised conventional and FHA loan limits in high cost areas only. Most parts of the country are unaffected by these changes.
10. Rental property and second home loans have tightened lending guidelines. Be prepared to produce a lot of documentation.

1. With values declining, appraisals are under the microscope. Lenders will more than likely start ordering their own appraisals from some type of consortium. Values will be conservative at best.
2. Private money or hard money lenders will enter the market to pick up the subprime collapse. Unfortunately, these people do not always come to table with the best interests of the consumer. Desperate borrowers beware!
3. Reverse mortgages are on the rise and investors are pushing this product hard. This is good product for the right reasons, but be sure to research it thoroughly before securing one.
4. Watch out for over-regulation! Government agencies and politicians are pointing the finger at everyone but themselves for the negative economic impact. The pendulum will swing way to the right before it settles somewhere in the common sense middle.