Mortgage Updates

Perhaps you have heard about the recent troubles in the securities market that have been shaking up the mortgage markets and forcing some well known national lenders out of business.  If you haven't been following the stories or are confused by the various "voices", I'll clarify.

First let's talk history:  When I first started in this industry there were three key ways to buy your home;  FHA, VA and conventional financing.  Conventional financing included loans from your local bank or Savings & Loan.  In order for you to complete the transaction full documentation was required.  Full documentation consists of a thorough check of employment and the averaging of your income over the last 24 months.  Unless you were using your VA eligibility you had to come in with a minimum of 3% down for FHA and 5% down for conventional loans.  Everything was scrutinized and reviewed 3 times before loan approval. (We used to kid with buyers about sending us their blood on a band aid!)

The last 15 years, FICO and the housing bubble:  Over the last 15 years lenders moved from Full Doc to ALT Doc.  Alternate documentation simply meant that instead of mailing away for everything - VOE, VOD, VOR Lenders would accept actual pay stubs and w-2's (with verbal employment confirmation) Bank Statements - instead of written a VOD, etc.  With the advance of FICO and the rating of your willingness and ability to pay your credit accounts things started moving very quickly into stated income and form there to stated income stated assets and then on to NO Ratio and NO Documentation (nothing at all) loan approvals. At the same time the required down payment moved from a minimum of 3%-5% to ZERO of 100% financing.

Since property values kept increasing it seemed that it was a no harm no foul situation.  Everyone was happy.  The buyer, the lender, and ultimately the investor. So, let's demystify "investor".

Investor:  We all know that after closing our payment coupons start coming from the "lender".  And, then in a couple of months you are asked to send your payment to a different company. Why?  You as the home owner will never really know who your investor is.  That is because you are only in contact with the "servicer" for your investor.  The servicer is the one who sends you your payment coupons, pays down the balance on amortized loans, manages your escrow account and pays the investor the dividend.  In other words they are the accounting firm for your loan.  Some of the larger lenders service the loans they originate, others sell some of their or all of their servicing to the servicing divisions of their competitors. Some times serviceing is sold during the course of your loan. - You get a letter asking you to send future payments to someone else. (We can talk more about that another time.)

So, how does this all tie together?  And how will this affect you or your family?  Since the first quarter of 2007, when the real effects of the slowing housing markets and the resets of ARM loans started affecting buyers, Servicing companies have had trouble collecting payments from home owners.  Many of these loans were originally made to troubled buyers with poor credit and difficulty in documenting income. When the investors dividends were affected and the losses started coming through they chose to back away and NOT buy (lend) on sub-prime loans.  This then affected the companies doing this business by requiring buy backs and reducing liquidity as well as the ability to pay dividends to their stock holders.  Margins were called, stock values tumbled resulting in bankruptcy.

In the last week, a similar scenario played out for lenders on the Alt A loans.  Wall Street investors, hedge funds, insurance companies, corporate investors and overseas investors.  This meant that several additional mortgage companies went out of business.  A top ten national lender American Home Mortgage now joined companies like New Century in closing the doors and leaving 7000 employees seeking other opportunities.

How will this affect you?  There are several things to prepare for.  If you are a first time home buyer meeting certain income limitations you will still find great loan opportunities with little or no down payment, although at higher rate.  If you are self employed and cannot document your income you will need very high FICO scores to find a stated income loan. There will be scrutiny surrounding your cash to close.  Of course since in this market it is ALL about risk, don't expect a fabulous rate. 

I welcome you comments and questions.  Please contact me at ipierson@americaschoicemtg.com