State of the Mortgage Market

by Tony Hain on January 6, 2011

Finding a mortgage if you have less than stellar credit became increasingly difficult in the past two years.  Even borrowers with perfect credit are jumping through paper trail hoops to borrow or refinance.  Changes are coming and the implications may affect the entire housing market.

What Happened?

Deregulation and computerized underwriting systems made loan application and approvals nearly instantaneous as the housing market exploded.  Most lenders had identical loan products as everthing was being sold on the secondary market through Fannie/Freddie.  When the government took full control of those entitites, they immediately began tightening lending restrictions and requring lenders to hold more in reserves and be more accountable for the loans they produce.  In general, this is good for the market and long over-due.  It is also the reason your underwriter is asking you to jump through all the paper trail hoops; if they fail to document even the most minor thing, they’re on the hook if the loan goes bad.

However, as discussions of Fannie/Freddie’s future and their role in the mortgage markets continue, they continue to tighten their guidelines so that only the safest loans are in their portfolio. The pendulum appears to have swung restrictively in the other direction. Many borrowers have turned to FHA loans, and here also, FHA is tightening standards and increasing mortgage insurance costs to cover potential losses.  This has reduced the availablity of loans for those with less than stellar credit.  But it’s not just the borrowers that are being scrutinized.   Condos in buildings where the owner occupancy ratio is less than ideal or more than 15% of the owners are delinquent on dues are finding that financing is unavailable.

The Return of Portfolio Lending

Where there’s a void and a need, eventually something will fill it.  And that is likely the story for the mortgage market in 2011.  Slowly, banks are creating new loan products to serve the market.  We should see an increase in loans available for those with varying credit scores, as well as condos with high investor ratios.  Risk-based pricing will be part of this, so that consumers will pay more for these options and investors will be rewarded for taking on additional risk.  As a consumer, this may mean more choices, but it will also require more homework as these products will differ from lender to lender with each developing their own standards and portfolio of loans outside of the conventional Fannie/Freddie framework.  Whereas shopping for a loan used to mean comparing apples to apples with the rate and reputation of the loan officer being the only differentiator, consumers may have an entire produce section of loan options, each with a slightly different nuance.

2011 Outlook

While interest rates remain at historical lows, rates have begun to gradually climb and this may continue through 2011.  Look for more loan options and some creativity to return to lending, but you’ll need to shop around to find just the right product as different banks develop their own unique offerings. And expect to pay risk-level pricing.

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