Are We Experiencing a Summer Thaw?

Over the past year or so, I have been giving you
updates on how stringent the underwriting process
has been.

The lenders have been squeezing the approvals
really tight, making sure that all the paperwork
is thorough and complete, and that there are
virtually no unanswered questions in their file.

They want to make sure that their decision will
not be questioned or criticized by anyone who
reviews their work, or by an investor who may
purchase the loan.

This has created an environment of low risk
tolerance. When in doubt, they are more inclined
to ask for more paperwork, or just to say no to
the request. It is the safest thing for them to do,
even though they may be turning down loans
that traditionally present reasonable risk.

There have some recent transactions that have
given us some hope that there may be a little
bit of thawing in the hardline responses that we
have been getting.

Not all of our lenders have been giving us the
same interpretation of standard FNMA and
FHLMC underwriting guidelines. This is a good
thing, because if we got the same answer from
all of our lenders all the time, we would not have
choices as to how to solve your problems.

Some of the areas that we are seeing some
loosening of guideline interpretations include:

A. Borrowers who own more than 4 financed
properties. The strict FNMA/FHLMC guide-
line is that they won't purchase loans if the
borrower is above this limit. Therefore, the
lenders won't create these loans if they can't
sell them to the agencies.

But we have found several lenders will exceed
this limit, and be willing to lend to borrowers
who have as many as 10 financed properties.

What this implies is that there has been an
expansion of investors into the mortgage-
backed security (MBS) market after the Federal
Reserve began backing away from the MBS
market at the end of March.

This return of private investors (non-govern-
mental) into the market is a big plus for all of
us. It introduces more liquidity into the market
for lenders to create loans and sell them. It
also introduces more alternatives to the lending
guidelines for us to place loans for our borrowers.

B. We are also seeing that some of the adjustable
rate loans being created are being a little more
liberal in their underwriting guidelines. Many
times these loans are underwritten for the lender's
portfolio without having specific investors to sell
them to. The lenders are more likely to keep these
loans because they know that the interest rates
will rise when interest rates in general go up again.

Because the lender only has their own internal
risk tolerance to meet, they are more inclined to
make reasonable assessments for borrower's
qualifications. They do not have to meet another
lending criteria that may be more restrictive in
order to sell the loan.

If private investors are starting to return to
the marketplace, competition will start to work
in the borrower's favor. If one investor will
be able to purchase loans and be profitable with
some element of relaxed underwriting standards,
others will enter the market to compete for that
business. From that we will either see lower
rates and fees or more aggressive underwriting,
both of which would be good for borrowers.

Although these two scenarios are not conclusive
proof that the pendulum is swinging away from
conservative underwriting standards, it does
give us some hope that some sense of reasonable-
ness will start returning to loan approvals.

If you have a situation that you need a solution
to, please contact me. There is a better chance
now that we may be able to find a lender to
consider your request.