Current State of Mortgage Financing...What's Going On?
Anyone watching or reading the financial news over the last few weeks has seen a lot of worry and anxiety over the state of the mortgage industry. Adding to this anxiety, several larger lenders have shut down operations and/or entire divisions while significantly reducing the types of loans they offer. But why??? What is happening, what does all this mean to you and most importantly... what should you be doing do right now to make sure you are protected?
Here's the scoop.
Over the past few years, many loans were made to homeowners with somewhat non-traditional or "non-conforming" situations. Examples could be: a poor credit history, inability to document income and/or down payment, or any number of factors that cause the loan to not fit in the traditional "box". These loans are often called "Sub-Prime", or "Alt-A", meaning that they were somewhat riskier in nature than traditional loans. Another type of "non-conforming" home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417, 000, which is the current maximum loan that can be done and later sold to Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done – but it's called a "jumbo loan" - and in the end the money for Jumbos come from private institutions and investors, not from the large government sponsored entities of Fannie and Freddie.
Recently the default rates (late payments) on many sub-prime and Alt-A loans have increased. This sudden increase in late payments has made investors question whether or not they had priced enough “risk” into what they paid for a given bundle of loans. In short, these investors have decided they paid too much for these pools of loans. Further, these same investors have been reluctant to buy more pools (or bundles) of loans since the ones they already own are not performing as expected & their value is somewhat uncertain. This investor reluctance to purchase new pools of loans has caused what many have called a “liquidity crisis” in the mortgage markets. It’s sort of like these lenders are between paychecks. They need to sell the pools of loans that they made 30-45 days ago in order to have the cash to fund the loans they are making this week, but suddenly the buyers aren’t there anymore.
In response to this situation, many lenders increased their interest rates on Alt-A, Jumbo and Sub-Prime to be better prepared - and likely over-prepared - for increased risk and investor appetite down the road. And even though Jumbo loans are not suffering from increased delinquencies, like the Sub-Prime and Alt-A loans are, these rates also popped higher because they are purchased by private entities that can't afford to take on any margin of risk.
What types of loans are NOT being impacted by this crisis?
Conforming loans (those that can be sold to FNMA & FHMLC), traditionally under $417,000, have not been negatively affected. In fact, the rates on these loans have improved slightly over the same period of time. The good news here is that this is exactly the type of loan that most people get. Conventional loans account for roughly 70-75% of all mortgages made. Also, government loans including those insured by FHA and VA have not been impacted. For all of these loans, it is typically a requirement that a borrower provide income and asset documentation using pay stubs, W-2 forms, bank statements, etc.
What happens next?
The major damage is probably already done, and the present situation will likely settle out over the coming year. Lenders will stop pulling products off the shelf, and the rates on products that have moved significantly higher now should trend lower as delinquency rates stabilize. You can also bet that Congress will get involved – don’t be surprised if we see a flurry of new bills & laws designed to modify the “non-traditional” mortgage lending market.
But here are a few important things YOU should do right now:
ONE: Even if you are not presently in the market for a home loan of any type, make sure that your credit standing is as solid as possible. Some borrowers that are currently in the market for a home loan didn’t make plans to ensure their credit (and credit score) would qualify them for the best possible financing. With no immediate need for a home loan, time is on your side... why not take a few minutes and just make sure you are prepared, should a need arise down the road?
A great place to get a free copy of your credit report is www.annualcreditreport.com. It’s a site sponsored by all three credit agencies to assist consumers in knowing what lenders see when we pull your report.
TWO: If you are in the market for a home loan, or know someone who is - understand that now is the time to be working with a professional who will keep you informed of changes in the market and get your loan funded quickly. Now is NOT the time to be playing the risky game of trying to scour the entire nation (and/or internet) to find someone who promises to save you a paltry amount on closing costs, or deliver a rate that seems too good to be true.
Your home and your financing are just too important, and times have changed. I am here to help and advise during these volatile times - and would welcome calls from you, your friends, family, neighbors or coworkers.
Provided to you courtesy of:
Jeff Medlin, First Citizens Mortgage
(252)637-8226
jeffrey.medlin@firstcitizens.com
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