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Welcome to the Wild Wild Mid-West
Oh the doom and gloom continues! Just when the housing market was poised to regain its balance, along comes the troubled sub prime mortgage industry to yank the rug out from under its feet. Scandalous behavior by unethical mortgage brokers and guideline savvy borrowers led to double digit foreclosure rates and have forced lenders to pile their money into safes and do their best to prevent anyone from buying a home
At least that is what you might believe if you read the paper, watch television, or live anywhere above the surface of the Earth. While the lending landscape has changed, it is far from the barren wasteland you may fear.
Where Are We and How Did We Get Here?
During the housing boom, home values appreciated at such a rate that lenders relaxed their requirements for riskier (sub-prime) loans because they felt insulated from risk by the continuously strong increase in home values. There were also many lenders that specialized in lending to these borrowers. Many mortgage brokers and borrowers treated the guidelines like speed limits and worked slightly (sometimes significantly) beyond the edges. They stated income above what the borrowers actually earned in order to purchase homes beyond their means and used excessively optimistic appraisals to refinance false equity into cash.
When housing appreciation leveled off, many homeowners were unable to refinance their way out of a jam and the house of cards began to sway. Foreclosure rates jumped and the lenders who specialized in these loans didn’t have enough solid loans in their portfolio to stay afloat. Many went out of business. Those who didn’t removed risky loan programs. During the spring of this year, every week brought memos of another program being pulled.
The two factors that correspond to the highest level of risk in the lenders’ eyes and saw the most change are those at 100 percent Loan to Value (meaning no down payment) and stated income programs (popular with self-employed people who might earn more money than their tax returns account for).
During the spring it was common for homebuyers to find themselves approved for 100 percent financing on a fantastic five-year ARM with an attractive second mortgage, only to have that program dropped prior to their closing. Not only could they not find something similar, they became ineligible for any loan unless they could secure 5 percent down, which they frequently could not.
Just an Adjustment
This is not a house of cards coming down. Just think of it as closing up the poolhouse of cards for the winter.
Compared to the freewheeling lending of the last half decade, the new guidelines shocked a lot of homebuyers. Many people had become accustomed to getting approved for mortgages with marginal credit, little to no money in the bank, and with resulting monthly payments that amounted to 75 percent of their gross monthly income.
The truth is that there are still great mortgage options available to a majority of homebuyers and rates are very close to the historical low water mark.
Ten or so years ago 100 percent financing was unheard of. If you wanted a house, you needed five percent down. If you qualified for an FHA loan you could get by with three percent, but could only buy a house worth $130,000 or less and the house had to pass a strict inspection.
Depending on what generation you fall into, that may seem horrific. If it does, ask your parents about the loan application for their first home. A 20 percent down payment earned them a fantastic 12.8 percent interest rate. That means they probably paid a similar payment on a $75,000 house to what you might have paid on your first $195,000 condo with your fancy 100 percent Interest Only ARM.
Or ask your grandparents. Chances are they put on their best suit and dress and sat at a desk in their bank pleading for a loan while the banker looked down his nose at them and blew smoke in their face.
Credit Springs Eternal
Just like new trees sprout up in the aftermath of a forest fire, the removal of one loan program means another will shoot up to take its place. Two of the most significant changes are:
Stated Income Programs
As of August, stated income programs will be officially off the table. That means you will have to document whatever money you say you make. In response, you will see lenders allow different ways to document your income. Instead of two years tax returns and your two most recent pay stubs – you might get by with 12 months of bank statements, a copy of your contract if you are self employed, 24 months worth of deposits, or something similar. Additionally, lenders have come out with programs with higher allowable debt to income ratios. So they want to know exactly what you make, but might allow you to borrow up to 65 percent of your gross monthly income instead of just 49%.
Zero Down Purchases
It is risky business in from a lender’s point of view to lend money to someone if the borrower doesn’t have any of their own money to contribute. It makes it much easier for the borrower to simply walk away and it also means the lender is likely to take a larger loss if the home has to be sold at auction. In April and May the credit scores required for zero-down financing jumped. Since then we have seen them come back down into the 600 range, but we have also seen more one-loan programs take the place of the previously popular 80/20 combos. With one loan, you do have to pay mortgage insurance (MI) which protects the lender in case of default, but the MI rates have fallen, the rate on the singles is lower than the blended rate on an 80/20, and you only have one loan and one set of closing costs.
The best recommendation for ALL borrowers regardless of credit score or loan program is to look at all of your options. This may mean talking with more than one loan officer or bank. Working with a loan officer that works with many lenders can save you time and can get you a better rate. Just be protective of how many times your credit report is pulled, more than a couple times in a short period can damage your score.
Scott Hayne is a Real Estate Agent and Mortgage Officer and can be reached for comment or questions at scott@scotthayne.com or through www.scotthayne.biz
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