It Is Not "Business As Usual"-
More Underwriting Changes

If you have been following the headlines in the business
section, you know that there has been a lot of publicity
about the increase in mortgage defaults and foreclosures,
the losses that the lenders have been experiencing and
the losses that are rippling through many brokerage funds
that Wall Street investors bought into.

As a result of this, there is a continuing trend of tightening
up the underwriting and approval process, of limiting loan
amounts and loan-to-value ratios, and requiring higher
credit scores than they had been requiring in the past.

Some of the recent changes to be aware of:

100% financing is much tougher than it was before, and
there has been a withdrawal from doing these on a
"stated income" basis.

Interest only loans are still available, but the qualifying
for these loans will be based on the fully amortized
payment of the note rate, or on some calculation of
the fully-indexed rate if the loan is adjustable rate.

Minimum credit scores have been elevated. Where we
could have program availability with lower scores a
few months ago, they are now demanding higher
scores for the same lending program.

Appraisals are going through a more rigorous review
with the lenders and investors. Since the real estate
market has peaked, and dipped in some areas, the
reliance on the valuation is more important than ever.

More emphasis is being placed on cash reserves,
especially on the stated income loans. The guide-
lines are being closely adhered to, and approvals
on loans with marginal liquidity are much tougher
to come by.



The investors are at the top of the food chain. They have
the funds that fuel the entire process because they are
the ones that buy the Mortgage Backed Securities (MBS)
that are marketed through Wall Street.

The investors stipulate the levels of risk that they are
willing to accept in the MBS pools. They determine the
minimum credit scores, the loan-to-value ratios, the
monthly debt-to-income ratios, and the amount of cash
reserves the borrower needs.

They will also prescribe whether they will accept fixed
or adjustable rate loans, detached homes or condos, and
whether the pool will include stated income loans or
fully-documented loans.

From there, the lenders create loans based on those
guidelines. It is important for the lenders to create loans
that will fit into these MBS pools because they do not
want to keep these loans in their own portfolios and tie
up their available funds.

There are lenders that will create loans for their own
portfolios and not rely on selling the loans through the
MBS system. They generally will only offer adjustable
rate loans, their loan-to-value ratios are generally more
conservative, and their minimum credit score guidelines
are higher.

At times, it is difficult to understand why some lenders'
and investor guidelines are seemingly arbitrary and
incongruent.

But that is also my value as a mortgage broker. Because
there are so many investors, programs, and lenders, I have
a lot of choices to investigate to make the best match I can
for my clients. I would not want everyone's answer to be
exactly the same.

So, as we go through this tightening in the credit markets,
there are still many ways to put transactions together. It
is not as easy as it was a few months back, so it is time
to draw on my 30 years experience to brainstorm solutions
for this changing market.