A month ago, American Home Mortgage, one of the nation’s top 50 mortgage companies stopped funding loans leaving some homebuyers unpleasantly surprised at their closing appointments. Countrywide recently announced that they will be eliminating around 500 jobs nationwide as they try to ride out the liquidity shortage. Yesterday’s news reported that Capitol One is shutting down their mortgage division GreenPoint which specializes in Jumbo loans (loan that are above $417,000).
So what is going on with the mortgage/lending industry? Is the sky falling? Should we all sell immediately and start renting? As a homebuyer, what should you know and prepare for? I had the chance to talk to Rick Davis, Mortgage Banker with First Horizon to get his insights and point of view:
1.) So what started this whole volatility in the lending/mortgage industry?
The real estate and mortgage industries have been partying for 5 years, and now it’s time for the hangover. The pendulum has swung from one extreme to another. After making aggressive loans to marginally qualified buyers, we’re now trying to restore some sanity to the lending process. The unfortunate fact is that things will likely get worse before they get better.
The secondary market has gone away for many types of loans, putting a shock wave through the industry and creating the "Liquidity Crisis." This crisis has forced the mortgage industry to retreat back to the old ways of doing things-full documentation loans with strict guidelines.
2.) What can buyers expect when they are applying for a loan?
The loan application process has not changed, but the levels of documentation required have become more stringent for almost every loan program. Buyers should expect to work with an experienced, professional lender who is capable and equipped to interpret the market for them, and discuss how it impacts their particular situation.
With loan guidelines changing weekly, buyers should expect to have an in depth discussion with their lender about their loan program and qualifications: Is their approval for a program that has been changing (e.g. stated income, interest only or 100% financing)? What is their time-line for buying a condo and what is the likelihood that their loan approval may change during that time frame? Begin with a strategy and plan not just for your home loan, but for your home buying process as well.
3.) Are there certain kinds of loans that aren’t available any more (e.g. interest only loans)?
Yes, "no documentation loans" have virtually disappeared. High loan to value "stated income" loan have been significantly reeled in and eliminated in most cases. Investor loans are significantly more difficult to qualify for as well.
4.) Does this volatility affect high credit borrowers as well or will they be able to get even lower rates since they might be more sought after?
Yes, the volatility in the market is affecting ALL buyers, even those with excellent credit and for "Jumbo" loan (loans that are above $417,000). The secondary market is still trying to assess and price the risk and salability of all loans.
The American Home Mortgage situation is an example here. AHM was a profitable company, making lots of loans and earning lots of money. They went out of business quickly because the outlet (the secondary market) for selling their loans dried up overnight. So even someone with great credit and the ability to pay back a $1,000,000 loan is now finding it harder to obtain approval for, and has fewer loan options than 60 days ago.
5.) Will this affect other lending institutions, for example if a person is trying to get a car loan?
Absolutely. The US mortgage market is one of the most advanced lending markets in the world. The problems that are surfacing demostrate that there are serious flaws in assessing and pricing risk and lending money. Click here to read more about an article from the latest issue of Business Week regarding car loans.
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