It's All Changed

Roger Schlesinger
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Posted: Jan 12, 2008 9:24 AM

No matter what you have heard, whether it is from an "expert" or just a friend, the mortgage industry has changed dramatically with little notice by the general public and many in the industry. August '07 was when the first shot was heard from an industry that had been on a roll for decades, and less than six months later we have a "new ballgame". It wasn't accomplished through Government regulation, consumer advocates or any formal lobby. The ubiquitous "market" made it all happen and we aren't finished yet!

So what did happen? Six months ago everyone could, and most people did, get a Heloc: home equity line of credit. Not only did they get one but they didn't have to pay a thing for it and didn't generally have to qualify for it either. There also wasn't a limit south of 100% of the value of your house. Free is basically gone, qualifying is the only way to get one and high LTV's and lower credit has been replaced by high credit and lower LTV's.

If you had bad credit you simply went and got a sub-prime loan! (That is a dirty word now and besides their not available anyway). The supposed start of all the problems in the mortgage industry has all but disappeared. Most will find it wasn't the biggest problem in the industry, after all, but just the tip of the iceberg.

Conforming loans (up to $417,000 for single family residences on the main land of this country and up to $625,000 in Hawaii and Alaska) and jumbo loans had almost, but not quite, interchangeable rates. In some cases jumbo rates were actually cheaper than conforming rates. Rates are so far apart for the fixed loans in each category that jumbo's are barely mentioned now! And if you do mention them they generally are only available to those with a 680 score or higher.

But arms have survived, especially in the jumbo market. Let me reflect for a moment. Weren't the arms, and especially the interest only arms, one of the major evils of this industry! It is hard to say because unfortunately everyone lumped all loans that weren't fixed for the life of the loan into the one unmentionable category: (hint: second word is prime) loans.

Stated income loans, one of the greatest villains in the current debacle, are surprisingly still available to those with super credit scores. High loan to values, however, are out if you are trying to qualify with these loans. And before I forget you can still get a stated wage earner loan! (Some called these the liar loans). Where is the misunderstanding? Lenders or consumers? We will get to that!

Fannie Mae and Freddie Mac are the largest purchasers of loans in America. They have been called devils, and saviors by different segments of the industry. The FHA ( Federal Housing Administration) which played a much smaller roll in the industry has been called upon by the President to help correct the mess and to be more significant. The three organizations could be of greater help by buying loans at higher amounts than their current limits but they are being held hostage by Politicos and Institutions that aren't in favor. In return Fannie and Freddie have started adding fees to various loans and other fees to all loans that will eventually cost the consumer more. The answer to that and more follows.

Many states are going after the mortgage brokers as the bad guys who brought this all about. Many politicians are just finding out how the industry works and apparently aren't happy about what they have seen. The first results we have seen is a major exodus of brokers from the mortgage arena, which at least frees the industry from the , brokers and loan officers who were out of control mavericks, and of course over a hundred lenders that have gone. Some from bad management and some from having the bad luck coming from the inability to sell their loans. The shrinking of an industry can be good to a point and then it becomes a problem for the consumer.

Why have the aforementioned results come to fruition. The simple answer is all loans are sold! There are brokers, bankers and investors. No matter how the loan is originated, whether through a broker or a banker, they all end up (with some exceptions) with investors. That is the simple explanation of how this industry works.

Conforming loans are sold to Fannie or Freddie, and some to the FHA, but not a large enough amount (see above). In some cases some of these loans are held by lenders in their portfolios but not to any significant amount. Jumbo loans had a home on Wall Street, being placed into securitized pools, and sold to investors. That has basically disappeared! Taking it's place are portfolio lenders, smaller banks and some institutions on Wall Street, who offer 3, 5 , 7 and 10 year loans that all adjust after the fixed period. (Wasn't that one of the major problems with the industry?) Some of the smarter portfolio lenders are making these 40 year loans so the adjustment isn't as painful as before. When you had a 10 year arm and it adjusted it not only had a higher interest rate in most cases, but also a 20 year term. Now, at least the term will be 30 years which will help to keep the payment lower and result in less of a shock to the borrower. Until the credit market in the Country becomes vibrant again, where lenders can sell the pools of loans do not look for decent fixed rate jumbo mortgage loans. While the industry is suffering through it's worse disaster in history, and trying to right itself, the consumer needs to learn all possible aspects concerning their situation because this industry is all about money, and someone once said " Money is the root of all evil!"

Just something to think about.