Times . . . they are a’changin’

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Yes, in the mortgage business, the “times they are a-changin’.”  Although approximately 60 lenders have closed their doors since the beginning of the year, most of those lenders were sub-prime mortgage lenders — specializing in loans to borrowers with low credit scores and other high credit risks.  Last week’s closing of American Home Mortgage — the 10th largest loan servicer in the nation — was the first “A paper” lender to find themselves “soaked to the bone” in the mess of the sub-prime mortgage meltdown.  Although considered an “A-paper” lender, AHM did a considerable amount of loans that would be classified as Alt-A loans, generally good credit loans with a twist — stated-income, no-ratio calculation, no asset verification, and the-like. 

Yesterday’s announcement by Atlanta’s Homebanc Mortgage — Fortune 500 company and Atlanta’s most well known mortgage lender — marks another “A-paper” mortgage company who has gone down in the mounting liquidity problem of the secondary mortgage market, and in the words of Bob Dylan . . . have “[sunk] like a stone.”      

So what is changing . . . .

1.  100% financing is changing — as I predicted and posted in March as a repercussion of the sub-prime mortgage meltdown, 100% financing options will “tighten across the board.”  Add tightening credit guidelines with the current liquidity problems, and some lenders have stopped doing second mortgages all together.  (liquidity problem = no one in the secondary mortgage market to provide the funds to back and carry the loan)

100% financing options will be limited to higher credit score borrowers and loans with PMI (or private mortgage insurance) will become more and more common.   

2.  100% second mortgage financing is changing . . . or maybe even disappearing.  When you look at financing a home with no money down, the option of an 80/20 loan has been the norm for high to middle credit score borrowers.  And even though the 2nd mortgage interest rate was slightly higher (on the 20%), the total monthly payment was usually better than a comparable 100% loan with PMI.  Investors realize that the risk of carrying the 2nd mortgage — in a slowing housing market, combined with a liquidity problem, and in a market where home values in some areas may decline — the risks may out-weigh the current return, causing the rate for 100% financing 2nd mortgages to increase — as they increase, the option with PMI may start to calculate out to a lower overall monthly payment.  So, if you are an adamant “PMI hater” (a blog post for another day) you might consider changing your tune . . . or start saving up $$ for your 20% downpayment.

3.  stated income loans and Alt-A financing is changing . . . probably disappearing.  These loans used to make sense for self-employed, hard-to-document income borrowers.  But credit guidelines that can only be explaind with the fictitious word “coo-coo-roo-koo” and bad advice from loan officers have made these no-ratio, no-income, and stated-income loans (I think) a thing of the past.  In my opinion, these middle of the road partial-documentation loans will be replaced with an all-or-nothing philosophy.  Full documentation = best rate.  No documentation = a rate about 1.5% to 2.5% higher.   

4.  non-conforming loan types and loan amounts (interest-only loans and loans over $417,000) are changing . . . many of the nation’s top lenders have already raised rates on jumbo mortgages (some raising rates by as much as 1.5%, and on a $500,000 mortgage, that could mean an extra $500 per month, ouch).  Because these mortgages are not Fannie Mae / Freddie Mac loans, as the pool of available money shrinks to buy these loans in the secondary market, in the short-term, these loans will become more expensive.

5.  the lender versus broker argument is changing . . . there has always been a battle between mortgage lenders and mortgage brokers.  It is abundantly clear in this ever-changing market, there is a huge advantage to being a mortgage broker with multiple underwriting and funding sources as opposed to being a mortgage lender – tied to one set of programs, one set of guidelines and only one funding source.  Although I have had some wholesale lenders change their 100% financing guidelines, some change their 2nd mortgage guidelines, and a couple stop doing 2nd mortgages all-together; and although most have discontinued their Alt-A programs, and the vast majority have raised their rates for interest-only and jumbo mortgages . . . not all wholesale lenders have changed(wholesale lenders are the companies that mortgage brokers use to help our clients find the BEST programs at the BEST rates).  So, for now, the good news — Hillside Lending still offers 100% financing, 80/20 financing, 100% second mortgages, stated-income and no-doc loans, and I haven’t seen a big jump in interest-only and jumbo rates . . . but, in the wise words of Mr. Dylan, “don’t speak too soon, for the wheel’s still in spin . . . times, they are a-changin’.” 

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC.  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs, today’s interest rates, or the mortgage process in general, please visit www.hillsidelending.com.  

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2 Responses to “Times . . . they are a’changin’”

  1. More about telling the collective you, “so” « Says:

    […] 8, 2007 — Times . . . they are a’changin’.  ” . . . stated income loans and Alt-A financing is changing . . . probably disappearing.  […]

  2. More about telling the collective you, “so” « The Mortgage Blog Says:

    […] 8, 2007 — Times . . . they are a’changin’.  ” . . . stated income loans and Alt-A financing is changing . . . probably disappearing.  […]

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