That portion of the mortgage industry which has survived the first wave of public airing of its dirty laundry and public mistrust and anger in order to grab a share of bailout funds, is quaking with fear–especially since the economy is bracing for another tsunami of sub-prime ARM’s which are soon to come due, leaving homeowners with sharply escalating payments that will set off another round of foreclosures and defaults.
With mortgage bankers under the microscope and their tails between their legs, we are currently seeing attractive rates being advertised but prospective borrowers either being turned away as unqualified or well-qualified borrowers simply walking away from the available options as unattractive.
Points and ‘loan origination fees’ that were often waived during the heyday of irresponsible lending of the past decade, are cropping up again, along with non-refundable application fees just to have your application processed–and this is a real, separate fee—the borrower still remains responsible for out-of-pocket costs such as appraisals, inspections, escrow fees, etc., which the banks simply pass on to the borrower. While there was a time when points and fees, within reason, were an expected cost of doing business when financing or refinancing a home or seeking home-equity funds, they have been off the table long enough for newly-distrustful borrowers to now question their validity.
Banks have an obligation to their shareholders to turn a profit–and if they can’t do it by retaining a portion of a higher interest rate when they sell your mortgage on the secondary market (ie. to investors), they will do it with points and fees. So while the actual “interest rate” at which loans are advertised may initially seem attractive, newly-aware borrowers are questioning the difference between the interest rate and the larger “annual percentage rate,” which the banks are required to post as well. The annual percentage rate reflects interest at the given rate PLUS points and fees that the borrower is required to pay in order to proceed with the loan. It is the “real” percentage of your financing cost. It puts tentatively-qualified buyers out of the running, and erodes a large chunk of down-payment or equity that well-qualified borrowers are reluctant to give up, particularly on refinances and home-equity loans, with the plummeting value of their property evaporating what was once a comfortable cushion of “savings” for many homeowners.
Zero-down or small-downpayment loans are drying up. Two reasons that mortgage loans have historically been considered low-risk investments were: (1) society was not as “transient” as it is today–many homeowners used to work a lifetime in one job, actually paying off a home, which was then a rent-free nest egg for their retirement; residing longer in one place actually made a neighborhood a community, and their homes came to mean more to them than simply a roof over their heads; and (2) borrowers who had had to save for years to amass that critical 20% down were less inclined to walk away from that hard-won investment when times got tough. Accordingly, the requirement for cash down payments is generally back.
But with employers (when jobs ARE available) no longer offering pensions, and in light of the current deepening recession many are ceasing even to pay into a 401K or to match a percentage of funds that employees pay in themselves, good employees will continue to move around; is it realistic to pay out those fat points and loan fees when in only a few years you’ll be selling the home to relocate, and then paying them AGAIN when you resettle? Perhaps the American Dream of owning a home is no longer suited to the American lifestyle. For many, home ownership has become the American Nightmare, with job loss or a mortgage rate hike tying them to the burden of a home with a payment they can’t pay, yet cannot sell because they paid nothing down and with falling property values, the selling price will still not clear the existing debt.
The immediate changes you’re now seeing in the mortgage market are:
• you can expect them to no longer be so casual about “less than perfect” credit. You’ll pay a premium for a lower credit score in both a higher interest rate and higher points and fees–or be turned down.
• zero-down mortgages are out–a solid 20% is the ideal goal, and smaller down payments can be expected to be balanced out by higher rates, fees, and Private Mortgage Insurance
• as discussed above, expect points and loan fees to be tacked on at closing time, cranking a good interest rate up to a so-so annual percentage rate
• many lenders have instituted a non-refundable “application fee.” The ones I have seen have run from $400 to $750. While it’s not unreasonable that the lender should be compensated for the cost of your credit report and for their time spent working on your application, think about the reason they’re asking for this money up front: as payment standards tighten up, quite a number of applications are going to end up not making the cut. If you have “iffy” credit, a brand-new job, and lots of debt, you may want to hold off–apparently it’s no longer true that it “doesn’t cost anything to ask.”
• if you are being “gifted” or loaned your down payment by relatives, plan to sit on it in a bank account for several months, since the source of your down payment may now be researched more seriously–they want to be reassured that this is actually your money and that you are making an investment in the home–also, they don’t want you saddled with private debt that doesn’t show on your credit report but might endanger your ability to make ends meet according to their stricter debt-to-income formulas (of which, more below)
• debt-to-income ratios are being increasingly mandated by underwriters to ensure that new mortgages being packaged and sold as investments are not “bad paper.” The standard rule of thumb is, the house payment with taxes and insurance should not exceed 1/3 of gross monthly income, and house payment plus other debt should not exceed 50%. Slight exceptions might be made if the applicant is otherwise debt-free.
• as more government regulation comes into play, one can expect these standards to tighten, as mortgage loans will once again be required to comply with government-mandated standards in order to qualify for bundling the mortgages for sale on the secondary (investment) market, to keep investors safe. Most lending institutions can only afford to fund their mortgages temporarily, until the mortgages are sold–they need to recoup the capital from the sale in order to fund the next loan. They will be forced to tighten their standards in order to keep mortgage funds available.
• as a result of having to comply with tighter regulations, your mortgage lender will have a smaller variety of loan packages to offer, and will be unable to “negotiate” away fees to which you might object. (Then again, everybody’s brother-in-law will no longer be a mortgage broker, promising the moon and then glossing over a completely different picture on closing day.)
As can readily be seen, this step in the direction of responsible home lending is not going to help get underestablished buyers into homes–but consider how many of those buyers are now in desperate straits and facing foreclosure–was helping people get into dream homes they couldn’t afford really doing them a favor?
The market is flooded with homes fetching bottom dollar, if moving at all. All but the largest residential contractors are facing ruin, unable to finish projects in progress.
While I have no crystal ball on what is to come, this is the birdseye-lowdown on the mortgage market’s limited range of motion as it crawls out from under Round One of the subprime mortgage crisis. Hopefully the federal bailout will provide the foreclosure relief and regulation to lenders that have been the subject of so much tongue-wagging. Cautious optimism will only carry us so far.
02.17.09
