Tuesday, December 18, 2007

Sanity returns to mortgage lending.

While each day seems to bring more bad housing-related news, there is still money available at reasonable rates to finance the purchase of a home or refinance the loan on an existing home -- for the right borrowers.

Rather than exiting the market, lenders have simply retooled their guidelines, turning their backs on riskier lending as they actively court qualified buyers. Banks still need to make loans if they want to make money. The key is in the creditworthiness of the borrower. If you can prove income and have good credit, there should be no problem for you. We're just going back to sane underwriting. Prove that you make the money to qualify for the house and pay your bills on time, and you will qualify for the loan.

It's a shift, lenders want to see employed people, pay stubs, they want to see assets in the bank and FICO (Fair Isaac & Co. credit rating) scores of about 650, 660 and up. Over half the population has scores in that range. With jumbo mortgage loans, we have a lot more stated income money coming back to the market, but they have to score generally above 700. For stated mortgage loans, investors want to see reserve assets of at least 6-12 months of the payment to provide a cushion in the event of any financial difficulty.

For qualified first-mortgage borrowers, the loan products available have stayed basically unchanged since the market slowdown started at the beginning of the year. Lenders are still writing adjustable-rate loans of five and seven years, after which rates shift to the prevailing market rates; 30-year mortgages are also being written.
Rates for seven-year jumbo mortgage loans were close to 6% for borrowers with solid credit who put 10% equity into the purchase, provided they could document their income history.

The jumbo is maybe even better than it was -- rates have come down since their summer highes. Banks and other lenders need to lend to somebody, and the subprime collapse took away the taste for risky loans. The availability of both jumbo and conforming loans for qualified buyers reflects a flight to quality. If someone puts 20% down on a $1 million house they have an incentive not to screw up.

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