Mortgage Market

by David Kanis

2008: Year of Sweeping Changes for Mortgage Lending Qualification

Foreclosures are up. House prices are down. How bad is the current housing crisis? Can you even get a loan in today’s mortgage market? Should you be worried about your own credit situation?

The current trends, which include significant jumps in the numbers of foreclosure notices and overdue mortgage payments, aren’t pretty! More than 1.28 million properties were the subject of some 2.2 million foreclosure notices in 2007, according to Realty Trac, an online marketplace for foreclosure properties. Those filings affected only 1 percent of the nation’s households, but the total increase in foreclosures in 2007 was a whopping 79 percent compared to 2006.

Now when you think of how lending has a total “risk based assessment” mentality, you can imagine the sweeping changes that have occurred since last August in the mortgage industry! Currently, we have lost over 40% of the products that were available to qualified borrowers only a year ago. Many long time experts in the industry have commented that the mentality of underwriting has gone backwards over 10 years. One can only imagine how the negative impact of less qualifying products for borrowers will further effect the ailing housing market.

I have long said that mortgage lending is primarily about loan to value. What is the risk of the lender based on down payment or equity (in the case of a refinance) in the subject property? Logically, purchase down payments have increased. Beginning in mid March, the 100% purchase will temporarily become a thing of the past. Not because Fannie Mae and Freddie Mac no longer have the product, but because the mortgage insurance companies now refuse to insure a 100% purchase. And, the piggy backs to avoid mortgage insurance—gone with the wind! We are back to the late 90’s and a 97% purchase. So, a first time homebuyer’s best option might well be the bare minimum down payment required by FHA to purchase a home. 

The second underwriting criterion is to demonstrate to the lender the borrower’s ability to repay the loan. There are only two doc type classifications left in the industry. Fully verified income and stated income. But, stated income loans are only available in conforming loan limits. There are no longer stated income loans for what is termed a “jumbo” mortgage, commonly needed for higher priced houses.  Both doc types require that the borrower have a job for 2 years and prove that you are employed and have a way of earning a living. The days of the no doc (no job) loan are gone. So too, are all of the other myriad types of lesser documentation for what you could or could not prove. And if you state your income, you should expect your lender to execute that IRS form 4506T to audit within reason that what you stated on your loan application is indeed accurate. 

Of course, the most important underwriting criterion for any borrower is credit, and the requirements for acceptable credit scores have become more stringent as well. Fannie Mae and Freddie Mac both have gone to what is known as risk based credit score pricing. No longer does one interest rate apply to all borrowers. There are now risk grade classifications with pricing incentives for a credit score over 720. Less than 680, you can expect to begin paying required discount points in relation to your credit grade. Even the mortgage insurance companies have gone to risk based pricing. The lower the score—the higher the rates! 

There has long been a saying in the mortgage industry like that ole 60’s song, “My Momma told me, you better shop around”! But, it has become impossible if not dangerous for a lender to price a mortgage for a prospective loan shopper without knowing how much they intend to put down, their ability to repay, complete credit analysis, the type of property and their intent on occupancy status. Otherwise, let the borrower beware!

This is the opinion of David Kanis of Ashford Mortgage Advisors. You can reach him locally at 350-8886 or at www.ashevillehomeloans.com.