The Banking Business Brings Back the Basics

Remember when procuring a loan was more than a borrower signing their name and collecting a check at the closing?   Discussions with mature mortgage bankers have yielded similar responses towards the mortgage business lately.   Here are the highpoints of these conversations:  

  1. Mortgage Insurance companies no longer want to assume the risk of anyone who has a FICO score lower than 620.   Scores below 620 will require a minimum equity interest of 20% down.
  2. If the subject property is located in a so-called œDeclining Market by the appraiser, Fannie Mae, Freddie Mac, or the investor (i.e. the bank), the appraised value may be subject to a 5% reduction, effectively reducing 100% financing to 95%.   95% financing is reduced to 90%.   The borrower will be asked to make up the difference.
  3. New construction condos and condo conversions require extensive documentation from the developer (see my recent post on condos) even if the building has been turned over to the association in the last year or possibly two.   These properties also require a minimum of 10% equity as a primary residence.   Investment condos require substantially higher down payments.
  4. Stated income programs are becoming so rare, some bankers question if they will be around much longer.
  5. Jumbo mortgages are being priced well over the fair market value to compensate for the inherent risk they carry.   Perception may be a better word.
  6. The traditional spread between the 10 Year Treasury Note and the Fannie Mae 30 Year fixed rate mortgage is about 150 to 200 basis points (1.5 to 2 points).   The recent spread has widened to well over 300 basis points.   Market risk has been passed on to the consumer as investors demand a higher rate of return on all home mortgages.

Some of the points concerning borrower qualification and condominium risk assessment are nothing new.   Before this decade, these were in fact commonplace and expected.   The years since 2001 offered such a lax market that everyone assumed it was easy and simple to attain a mortgage.   The only correct assumption that can be made now is to expect greater demands by banks concerning borrower feasibility until the marketplace finds balance and corrects itself.  

Consider ourselves lucky that we have not completely returned to the days of 25% to 30% down as they once were.   FHA still offers a government agency insured loan with a 3% down minimum, for example.   The best borrowers with the best credit will need to be patient and understanding that this is not a personal vendetta against them, rather an industry wide correction of a marketplace that ran amok with bad programs for bad credit risks.  

© 2008 Michael S. Amers  

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