Last month, I addressed the turmoil that existed while the nation was in the heat of the fallout from the sub-prime market fiasco. I provided a quick summary of how we got to where we were, and what the likely landing place would be for borrowers, lenders, mortgage products, and home prices. Today, with more “stability” in the market from the perspective of new underwriting guidelines and steadier interest rates, please find the following update:
Borrowers: – If you are a traditional “vanilla” borrower in the market for a conforming loan (<$417,000), with good credit, a strong loan to value ratio, and full employment, you are in good shape. These are the loans that are sold to Fannie Mae and Freddie Mac, quasi-government agencies. The rates on these loans are now at their lowest since early spring. Borrowers with poor credit or without the ability to document income or assets will have very few places to turn too. Products: Jumbo mortgage (>$417,000). There is very little if any appetite for secondary investor market to purchase these loans from banks and mortgage companies. Therefore, the rates have risen substantially since the beginning of the credit crunch. Those banks who are still willing to write jumbo mortgages are pricing them at an interest rate high enough to appeal to Wall Street at a later date and/or at a rate they are willing to hold in their own portfolio. These rates may differ greatly from bank to bank. A self-serving plug here - Chase has the lowest jumbo rates on the street.
ALT-A (No Doc, Stated Income, Stated Asset, etc). There is no good news. Many lenders are not offering these products at all. Those who are have increased rates, and dramatically tightened underwriting standards. Credit score minimums have increased, loan to value ratios have decreased. Less than full documentation is available for only specific types of borrowers.
Lenders: - Not surprising, a great number of lenders have gone out of business or have reduced their product offerings. Over 150 lenders have closed their doors. These were primarily mortgage companies and brokers who did not have a diversified business model, and whose sole income came from mortgages.. In addition to American Home Lending, which shut its doors in July, Country Wide is suffering a severe financing crisis, and is offering only Fannie Mae and Freddie Mac eligible products. Washington Mutual (WAMU) yesterday reported they expected further fall out from some of their prior lending practices. Both WAMU and Countrywide were significant underwriters of “option arm” mortgages, which gave borrowers a choice of 4 payment options, including one which allowed for a below market interest rate cash payment, with the difference between market payment and the cash payment being ADDED to the borrowers mortgage balance each month. This is known as a negative amortization mortgage. Guess which choice of payment the majority of option arm borrowers chose!
Home Prices: - There was a national decrease in the prices of homes for the last quarter reported. The size or percentage of the decrease varied from locale to locale, with some locations even increasing. It is not believed that the full effect of the mortgage crisis has been felt, as the turmoil in August would not have effected July and August home sales. Contracts for new existing homes signed in August were the lowest in the 6 years that records have been kept.
So again, what does this mean to you?
If you are a new home buyer, chose to work with a bank for your mortgage. Banks have a diversified stream of income, and are required to keep a strong balance sheet and reserves.
If you are looking for a jumbo mortgage – shop. Lenders are being forced to keep their own jumbo loans, and the rates may vary dramatically from bank to bank. Also, ask your loan officer to run some numbers splitting you loan into a maximum conforming rate loan ($417,000), and a second mortgage for the balance. I have found for many of my clients that this can provide a significant savings over one jumbo mortgage.
If you have an adjustable rate mortgage whose intitial rate expires in the next couple of years, consider refinancing NOW! Rates for conforming loans have dropped to their lowest since early spring, after a pretty dramatic run-up in the late spring and early summer. Again your loan officer should be able to provide you a cost benefit analysis.
If you are a real estate broker – Make sure that your pre-qualification letters are from a bank, not from a broker or mortgage company. At the least, have your clients provide a back up letter from a bank. It was reported that 30% of brokered transactions in August did not close If your client is stuck at the closing table without funds, nobody wins.
As always, I welcome your comments.
