The Credit Crunch
Posted at 9:23 AM, Aug. 14, 2007
Submitted by: Edward Fallon, Carteret Mortgage Corporation
As a mortgage broker I see the current credit crunch tightening every day. Lenders (banks, mortgage companies) are making immediate and severe changes to their programs and guidelines, sometimes twice a day. Every lender is touched by this. This is a temporary situation, but we don’t know how long it will last.
Many previously qualified buyers have already experienced problems getting a mortgage at an affordable rate, if they can get one at all. One exception: buyers seeking conforming loans (loans that conform to the more prudent guidelines of Fannie Mae and Freddie Mac and whose mortgage is $417,000 or below) are less affected in their ability to secure reasonable terms; in fact, last week we saw a drop in the average 30 year fixed conforming rate.
However, the non-conforming market is in dire straits. A non-conforming loan can be any loan that does not conform to Fannie Mae’s or Freddie Mac’s guidelines. You have heard quite a bit about the sub-prime meltdown. We’ve heard more recently about the Alt-A problems; a Top 10 lender has been effectively shut down because of the lack of liquidity. Think “No Doc” and “No Income” loans.
The market for jumbo mortgages is severely impacted by this, as well as second mortgages. Jumbo mortgages are among the best performing (low delinquencies, low foreclosure rates) mortgages, but they are lumped in with other higher risk non-conforming loans. Major jumbo lenders have raised their rates up to 8%. Purchase markets that depend heavily on jumbo mortgages have been shut down.
Many lenders have either cut out or restricted the use of second mortgages and home equity lines. The popular “80/20” programs are becoming harder and harder to find.
The problem is liquidity – Wall Street, temporarily, has few buyers for anything but conforming mortgages, and those buyers have become understandably conservative. How can you price something that no one wants to buy? How do you sell something without a price? Until the market figures out the true risk and cost, we will continue to have disruption. We will also be left with tighter credit standards and more limited programs.
That knowledge alone doesn’t help the average buyer, seller, and real estate agent. Even if your buyer isn’t seeking a non-conforming loan, what about the buyer of his home or the seller of the house he wants to buy? This is why the credit crunch affects everyone.
What should you do? Make sure the pre-approvals you have are solid, fight hard for the best customers, and work on improving your buyer’s credit profile. Here are 5 suggestions:
- Re-approve every buyer you are working with. The piece of paper you have won’t mean much if the lender is out of business, or the interest rate has skyrocketed. Lenders are eliminating programs, restricting guidelines and repricing loan products every day.
- Seller financing. Can the seller take back a second mortgage if needed? Doing so may improve the home’s marketability.
- Improve the credit score. Use legitimate strategies to improve credit scores. A buyer should not do it himself; these strategies are sometimes counter-intuitive. Removing erroneous information and making small changes can have a dramatic effect on the credit score and, consequently, the cost of the mortgage.
- Reacquaint yourself with PMI. A buyer may not qualify for a piggyback loan. PMI is an affordable option and, in some cases, tax deductible.
- Stay away from the “No Doc” and “Low Doc” loans. They will be harder and more expensive to obtain. Many of these buyers may qualify with a lender who knows how to read a tax return.
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