Mortgages: The Raw Data

Posted by mortgageman

Tue Aug 12th, 2008 08:56 AM

In these times of great confusion and virtually no forecast of the mortgage market, I thought it would be a great time to take a step back and look at what is happening, present day.

The mortgage market has experienced substantial change over the course of the past year and a half or so; Guidelines are stricter, underwriting is tighter, credit is scarce, and worst of all it’s not over yet. Some of these items may not be of great surprise to you as they usually make financial headlines at least once a week, but I wanted to touch on a couple of items that, in my eyes, need to be addressed:

1. Home Equity Products are virtually non-existent and even if they are available, they don’t offer too much benefit. There are many reasons for this, one of them being that home prices are falling all across the nation, making these products very risky investments on the secondary market from a collateral perspective. Even if a bank does offer a Home Equity product, it will limit them to very low CLTV limits and very high credit ratings. The days of 80/20 and 80/10/10 financing are LONG gone.

2. PMI is the solution. Since HELOCS and HELOANS are no longer available as a way to offer subordinate financing, full 90% or 95% financing is achieved using one big mortgage with Private Mortgage Insurance. In this instance a bank receives insurance from a third party to insure the note (since it is above 80% LTV/CLTV) and the premium for this is passed on to you – the borrower.

3. The GSE’s (Government Sponsored Entities) are struggling. This is never good for any person working with/looking for mortgages, the GSE’s raised the premiums they charge to secure loans, they are not willing to securitize as many mortgages as they did before, and they do not want to keep a lot of risky/toxic assets on their balance sheets. Who would?!?!

4. FHA – The temporary band aid. You will hear these 3 letters used more and more often than usual over the next few years. FHA or Federal Housing Administration is a government entity that uses more lenient guidelines to offer more people mortgages. There are many variables to this program but in a nutshell, they generally do not have a credit score requirement, you need to have stable income and must be able to prove it, and you need to produce various types of documentation to prove to the government that you are capable of repaying the loan. This all comes at a price and is not cheap. Doesn’t it remind you of that little mishap we all want to forget? Subprime?.

5. JUMBO Mortgages – Most banks are not able to get them off their books and therefore are not able to write new loans at decent interest rates. It seems like the mentality is that since there is no secondary market for JUMBO mortgages, the banks will have to take more of a spread to keep the loans in their portfolio. As a result I am currently offering 7.375% on a Jumbo 5/1 ARM @ 0 points.

This is just a small piece of the puzzle and is how I see the mortgage market present day. Almost every Fortune 500 company which at some point in time offered or continues to offer conventional mortgages, is reporting huge losses and we are certainly not out of the water yet. The outlook is to remain positive and hope for the best, the damage has already been done. And as Noah has said many times before, there is no such thing as free lunch.

Before I forget, I am MortgageMan. I am a loan officer at a major financial institution in the NYC area and have chosen to use an alias to remain anonymous. My goal will always be to give you a clear view of the current market status from a lender’s perspective. I will try to post consistently, and prioritize discussions when the market that I work in sees a drastic change; either for better or for worse.

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