Recent Changes in the Mortgage Industry-Some Things You Should Know

As the shake-out continued through the end of 2007,
more changes are rippling through the mortgage business
that will affect costs of getting a mortgage, availability
of programs, and qualifying standards.

**Recently, Fannie Mae (FNMA) and Freddie Mac
(FHLMC) announced that they were imposing a new fee
that would add .25% in costs to each loan that they
purchased from lenders. This was a one-time fee at
closing, not an increase to the interest rate.

FNMA and FHLMC purchase loans up to $417,000,
commonly called the conforming limit because those
loans are designed to conform to the lending guidelines
of those two agencies.

As you might expect, the .25% fee increase will be
passed through from the lenders to the quotes that
borrowers receive for the creation of their new loans,
and the cost will ultimately be borne by the consumer.

The fee increase was imposed as a way for FNMA and
FHLMC to recover some losses that they have incurred
through the bad performance of loans in their portfolios.

**A major player in the creation of stated income loans,
Washington Mutual, recently sent out an underwriting
update stating that they were imposing new guidelines
for the creation of those loans.

Specifically, they are requiring a credit score of at least
720, and they are limiting the maximum loan to be no
higher than 50% of the value of the property.

Not all lenders have adopted this same policy, but it
gives us an indication as to how far these loans have
fallen from favor.

When the pendulum had swung so far to the side of
liberal underwriting, stated income loans were available
all the way up to 100% of the property value. There is
a higher risk to the lender when they trust the borrower
to fairly represent their income instead of asking for
proof. But the interest rates and fees were supposed
to reflect their being compensated for the higher risk.

Beyond the fact that the lenders were creating these
loans is the reality that there was a huge appetite in
the capital markets to purchase these loans. There
was a lot of excess liquidity in the marketplace, those
funds were seeking what was thought to be safe
investments with good rates of return, and that is
what fueled what came to be the mortgage crisis.

The standards that served the mortgage business and
the borrowers well for many years was allowed to
erode and the investors and lenders did not choose
to adhere to the old standards because the money
needed to get out to go to work.

But with the new announcement we can see that the
investor appetite has dried up and the lenders are
all pulling back to various degrees to minimize the
risk.

**Second loans and lines of credit became very popular
over the last few years. Instead of borrowers getting
one loan which may have required private mortgage
insurance (PMI), it was less expensive for the borrower
to couple a first and second loan to meet their goals.

Home equity lines of credit (HELOCs) were heavily
promoted by many lenders to induce borrowers to
tap into the equity of their homes and free it up to
spend.

It was not uncommon for any lender offering second
loans and HELOCs to place their loan behind almost
any other lender's first loan. They based their
decision on the value of the property, they type of
loan that there loan would go behind, and the credit-
worthiness of the borrower.

As we discussed above, where these loans were
originally offered with prudent lending standards, over
time the standards were liberalized and the lenders
were accepting bigger risks.

The second loans were the most vulnerable in the
whole scheme of things, because that loan was the
one that was extending credit closest to the value
of the property. If property values declined (which
they did), or if borrowers could not make the payments
(which some could not), the second loan was getting
squeezed in the transaction and would suffer losses
before the first loan would.

The recent changes that many lenders have announced
is that many have pulled out of the second loan market,
and the ones that remain only want to create their
second loan behind their own first loan. To a large degree,
no more of getting a second loan from lender A when the
first loan is with lender B.

There are exceptions, but they are becoming fewer.

Just another sign that the lenders and investors have
pulled back from their more extreme positions and have
probably over-reacted while they try to determine what
defines acceptable risk in this new market.

As always, get in touch with me to talk over your situation.
If you need a stated income loan or a new second loan,
we still have choices - they are just not as plentiful or as
liberal as they once were.