Editor’s note: Sometimes it pays to learn from others, and in today’s real estate market lessons can come at a high price. This three-part series examines hurdles for homeowners facing foreclosure, buyers who are interested in buying those foreclosed homes, as well as options for standard borrowers looking to purchase a home. (Read Part 1, "Upside down: Homeowners share lessons in foreclosure," and Part 2, "Buyer beware: Foreclosure sales not for everyone.")
Despite the relentless onslaught of alarming headlines in recent weeks, there are still plenty of mortgage lenders willing to extend credit to subprime borrowers.
Although you might be hard-pressed to find subprime or Alt-A lenders offering 2/28 hybrid adjustable-rate mortgages (ARMs),100 percent financing or "piggyback" second loans, an informal survey of loan officers and mortgage brokers around the nation finds they’re still able to help clients from all walks of life buy or refinance a home.
Those clients have diminished in number, and thanks to tighter underwriting standards often have less buying power. In the short term, that could translate into fewer sales and more downward pressure on prices in some markets.
But in the long run, lenders say they’re ready to fund more loans if and when buyers return to the market in force — as long as they are willing to get their credit scores up and scrape together down payments.
Joyce Windschitl, a branch manager for Cherry Creek Mortgage in Chanhassen, Minn., said that for the most part, stated-income, negative-amortization and pay-option ARM loans are a thing of the past.
But there are several options available for borrowers with FICO scores of 620 or below. Depending on the borrower’s debt-to-income ratio, down payment and savings in reserve, a subpar credit score doesn’t automatically preclude families from home ownership.
Also, Windschitl noted, the FHA will guarantee loans with as little as 3 percent down, and Congress is considering lowering the down payment requirement and raising loan limits.
Windschitl also cited Bank of America’s Neighborhood Advantage Credit Flex and Zero Down programs for borrowers with good credit but limited cash to bring to the closing table.
She said Cherry Creek Mortgage can help clients obtain reduced-documentation loans with 12 months of bank statements or depletion of assets to prove income. Jumbo loans at up to 95 percent loan-to-value ratios are still available to borrowers with credit scores of 680 or better, Windschitl said, or up to 100 percent CLTV "if we can find the second mortgage."
Rates on jumbo loans have "gone up quite a bit," said Las Vegas-based mortgage consultant Esko Kiuru, because investors who buy such loans on the secondary market "feel they are too risky, so they want more yield to buy them."
Kiuru said business is "rather slow" in Las Vegas, as "a lot of people are sitting on the fence," waiting for something to happen with prices.
"Sellers here, and in other markets that are soft, they have to be very flexible," Kiuru said. "A carry-back is one option, or they may pick up (a portion of) closing costs or provide incentives like new carpets."
Seller carry-backs — in which sellers agree to finance part of a sale through a second loan — are acceptable to lenders, as long as the first mortgage is 80 percent or less of the property value, he said.
Interest-rate buy-downs are another incentive sellers can offer buyers who are "a little tight," Kiuru said, but not all lenders offer such programs.
Prices, Kiuru said, "got out of hand during the boom years, and they are retreating now. Those who can qualify (for a mortgage) are hoping the prices will go even lower. You can understand that, in a way, because nobody knows for sure when the bottom will hit. Right now, I would say it’s a good buyer’s market."
The self-employed borrower
East of San Francisco, Janet Guilbault, a loan officer with Peregrine Lending Co., said she serves clients who have excellent credit but prefer stated-income loans because they are self-employed.
Because of the San Francisco Bay Area’s high housing costs, most of the loans Guilbault handles are jumbo loans that aren’t repurchased or guaranteed by mortgage repurchasers Fannie Mae and Freddie Mac.
While there are still plenty of jumbo loans for prime borrowers who can document their incomes, "the mortgage crisis has hit self-employed borrowers in a big way," Guilbault said.
"Lenders simply do not like the combination of a high loan to value and an income that is not documented," Guilbault said. "Even if on paper the loan appears as if it will fly, lenders still cut appraisals, and refuse to believe the stated income. No loan is a sure thing anymore until the day it is funded."
Guilbault said her clients make plenty of money and generally have good credit but prefer stated-income loans because they write off much of their income for tax purposes.
"They have complicated financial lives and often own multiple investment properties, as well as a second home," she said. "Going stated enabled these borrowers the ability to show via credit score and equity in the property that they are a good risk, and will pay their mortgage, without explaining tax returns."
It’s no small task, for example, to provide a lender with rental agreements for all the apartments or commercial properties they own.
"The people in our society that use stated-income loans make the world go round," Guilbault said. "They own businesses; they are out there spending money, and employing people, and they have been painted with the same brush as someone with a low credit score doing a 100-percent loan with stated income."
Guilbault said in a quest for the better rates, she’s moved her jumbo loan business from "big ticket" lenders like Bank of America and Washington Mutual to portfolio lenders like ING. But portfolio lenders are tightening their guidelines, too — in what can sometimes seem like arbitrary ways, she said.
One of Guilbault’s clients with a credit score of 763 had $100,000 in deposits at the bank where he applied for an 85 percent cumulative loan-to-value ratio loan. He was turned down because, even though the application fell within the lender’s guidelines, the bank "didn’t like" the income her client was claiming, Guilbault said.
"My observation is that whenever you have fewer and fewer people offering what you need to buy, they have the ability to make the rules, because there isn’t as much competition," she said.
In the past, lenders might have been willing to grant an exception if a borrower fell two points shy of the required credit score for a stated-income loan. Those days are gone, Guilbault said, and lenders are also more apt to question an appraisal — another potential deal killer.
"You can have a perfect buyer with a great credit score, and have the loan blown to smithereens because they’re going to cut the appraisal by $100,000," Guilbault said.
Another new rule that’s made it tougher to refinance: a requirement that a home be off the market for a specified period of time before refinancing is permitted.
As a result of the changes in jumbo lending, "cash and credit score are king," Guilbault said. To get the best rates, "the only solution that I see for (jumbo) borrowers is to start adjusting their financial lives in a way that will allow them to fully document their income."
Mortgage advisors navigate new roads
Gainesville, Ga.-based mortgage advisor Jefferson Otwell of Homestar Financial Corp. said subprime is still around, but is "a bit tighter."
"Alt-A has taken it on the nose," Otwell said, echoing Guilbault’s experience in California. "I can find bank-statement-only loans, but very few true stated programs. Those that are around are greatly curtailed."
Otwell said lender’s Alt-A rate sheets are getting shorter.
"I recently lost a deal to someone who either talks a good game or still has access to a high LTV no-doc loans," he said.
On any given day, Otwell said, interest rates are "twitching up and down."
He’ll price out a jumbo loan on a Tuesday and lock it in on Thursday at what had originally been the higher-rate lender, he said.
An even bigger surprise to Otwell has been the decision by many big lenders to stop funding second mortgages.
"Even if the borrower is approved at a 780 credit score, some big lenders simply will not fund a 15 percent second after an 80 percent first," Otwell said.
With lenders "craving an equity buffer," high LTVs are a bigger obstacle than low FICO scores, Otwell said.
Staying under 90 percent LTV is good, Otwell said, and staying under 80 percent "is even better."
Otwell sees no reason to make drastic changes to the programs offered by Fannie, Freddie and FHA. He feels the Bush administration’s new FHASecure program "isn’t too invasive," but called proposals by some lawmakers to raise Fannie and Freddie’s limits "obscene."
If Fannie and Freddie are allowed to expand, "we shouldn’t do it at the high end but through something more like MyCommunity and Home Possible refinances of subprime ARMs," Otwell said. "The rich can ride out financial difficulties better than the poor."
In Chicago, residential mortgage advisor Russ Martin of Perl Mortgage said subprime borrowers are "out of the market" unless they qualify for an FHA program.
"Being able to document income is a must," Martin said. "Stated-income programs have been severely curtailed, and you will probably need 20 percent down to get decent rates in most scenarios"
Most loan products are still available for borrowers on the higher end of the credit scale, Martin said, but "rates have increased quite a bit."
"Overall, nothing has really changed dramatically for my (high-end) clients," Martin said. "One hundred percent financing is still available, but not from as many lenders as before."
Martin, author of the blog SmartMortgageAdvice.com, said most of his jumbo buyers are opting for ARMs. Perl Mortgage, he said, has portfolio lenders with ARM rates that are "dramatically better" than those offered by most major retail banks.
"I can do a 7/1 (jumbo) ARM in the low sixes right now for a $1 million loan versus the mid sevens for a 30-year (fixed)," Martin said.
Martin said he would support some type of national licensing if it applied to all loan originators regardless of whether they worked at a bank, brokerage or credit union.
"As a (mortgage) broker, I am concerned because most of the laws only seem to apply to brokers as we have been made out to be the villain … in this mess," Martin said.
"The bottom line is that if you are calling yourself a loan officer and originating mortgage loans, you should be licensed to show a basic level of competence," he said. "Right now, we have a patchwork of state laws and federally chartered banks skirting any kind of requirements to actually license their loan officers."
Mortgage brokers and loan officers who score clients using automated loan-origination systems and using private mortgage insurance can still find loans for borrowers with credit scores down to 580, said Michael Byrne, a loan counselor with Gateway Funding in Hillsborough, N.J.
"It depends on a little more than simply a credit score," Byrne said. "However, I have recently closed a 95 percent loan-to-value (LTV) cash-out debt consolidation FHA loan for a client with a credit score below 620."
What has gone away, he said, is stated-income, stated-asset, 100 percent financing for borrowers with a 620 score or lower — "and rightfully so."
Also gone from the marketplace are many of the high-LTV pay-option ARMs, Alt-A products for borrowers providing reduced documentation, 100 percent loans for investors, and 80-20 "piggyback" loans, Byrne said.
Gateway Funding is still offering 90 percent financing to reduced-documentation borrowers with good credit scores through Fannie Mae’s Quick and Simple program, but to a limited extent. No-documentation loans are available, "but with stricter guidelines and more pricing hits," Byrne said.
Some lawmakers are calling for the $1.4 trillion cap on Fannie Mae’s and Freddie Mac’s loan portfolios to be raised so the government-sponsored entities can buy up more mortgages in the secondary market. There have also been calls for boosting the conforming loan limit above the current $417,000, so the GSEs can play a greater role in the jumbo loan market.
Byrne said he thinks Fannie and Freddie are "fine the way they are," but advocates an increase in the maximum loan size that the Federal Housing Administration (FHA) can guarantee.
"This is a great product that has been underused in many markets," including California, Byrne said, because the median home price often exceeds the upper limit for loans to be eligible for FHA guarantees.
Byrne would also welcome a national licensing requirement for loan officers.
A mortgage banker, Byrne said mortgage brokers have, to an extent, "been singled out unjustly for many of the current problems. Many lenders who opened huge call centers and ‘churned’ out huge amounts of subprime loans were in fact mortgage banking firms, rather than small brokers.
The problem with subprime loans involves mortgage brokers, but is not limited to just them, Byrne said. Wholesale lenders, mortgage bankers, Wall Street — "everyone involved in a real estate transaction, and ultimately the consumer — all should share some culpability," he said.
In Los Angeles, Wilshire Financial Inc. mortgage advisor Ricardo Bueno said he’s working with an out-of-state client with a 617 FICO who wants to refinance out of an adjustable-rate mortgage. Bueno said that with a 65 percent loan-to-value ratio, the best rate she can hope for on a 30-year fixed mortgage is 10 percent.
"Is it better than what she currently has? Only slightly," Bueno said. "It’s an investment home, and she hasn’t decided whether to keep it or not."
Bueno said that in the year and a half he’s been originating mortgage loans, he’s moved from subprime to a more upscale clientele.
"I started out last year farming my neighborhood, and did well with the Spanish-speaking market I was targeting," Bueno said. When business slowed down in January and February, "I began to realize the market I was working was the subprime market. I couldn’t get certain deals funded."
Bueno said he began seeking more business online, speaking to a different client base, "and that did fairly well until August. This month shook me up."
Clients come to him with "these preconceived notions that the market is what it was a couple months ago," Bueno said. "I will always sit down with a client and say this isn’t possible now, but we can work toward a program that will save you money down the line."
Often clients are too embarrassed to come back, he said.
"I would love to maintain some sort of relationship with all the files we put a red stamp on, but our conversion rates aren’t the greatest on that," Bueno lamented.
In Las Vegas, lenders have become especially tight about loaning money to investors, Kiuru said.
"You need to document everything, and have a very solid credit background, or you are not going to get any money," Kiuru said of the Las Vegas market. Lenders "got burned during the boom years. You not only had a lot of investors, but speculators and flippers who came into town. They were probably the main reason this market got so overheated."
Lenders aren’t hesitating to finance buyers with decent credit scores who are willing to put some money down on a home that will be their primary residence.
"Your credit score has to be pretty good if you want to get some kind of subprime loan," Kiuru said. "You don’t get nothing-down loans with a 600 FICO anymore. But if you have a good credit score, there are still plenty of programs available."
For subprime borrowers with FICO scores of 620 or below, "You would need at least 10 percent down," Kiuru said. "I don’t recall seeing anything less than 10 percent (down) for that kind of FICO score."
Lenders prefer that borrowers be able to document six months of reserves, compared with three months before tightening got underway, Kiuru said.
Kiuru said prospective buyers shouldn’t give up if they can’t qualify right away.
"Even if they don’t have enough down-payment money, they should still call a lender and explore whether there are creative ways to get a down payment," he said. "Relatives can help, or maybe there is a program we can find. The important thing is not to give up, but to call a professional lender and discuss their personal situation."
Jeff Tumbarello, a loan originator for Union Savings Bank in Columbus, Ohio, said the bank’s business model has "survived the crisis because we do common sense loans. There’s always a margin of safety. We’re not very aggressive, although we’re aggressive for the right people."
For borrowers with FICO scores of 620 or below, the bank offers FHA, VA and Ohio Housing Finance Agency programs.
"We’re on track to having a pretty good month, Tumbarello said at the end of August. "The office is quite busy. We’re closing 25 to 30 loans tomorrow, and picking up business where a lot of the other lenders have fallen off."
Although Ohio has one of the highest foreclosure rates in the nation, Tumbarello said Columbus offers opportunities for investors who concentrate on generating monthly cash flows from rentals, rather than generating profits buying and selling property.
"Columbus is a great market," said Tumbarello, who recently relocated from Florida. "There’s a ton of industry, you have Ohio State University, major banks and insurance companies — it’s a stable, bell-curve-type market, without the peaks and valleys of a market like Florida. It’s steady Eddie."
Orlando, Fla.-based mortgage broker Eli Magen said that lenders are "closing down almost on a daily basis," including some of his personal favorites such as American Brokers Conduit, First Magnus and GreenPoint Mortgage.
Right now, Florida is a buyer’s market, with a ratio of 15 sellers for every buyer, Magen estimated.
But if borrowers don’t qualify for FHA loans, tightened underwriting standards have "denied many customers from their desired home purchase."
"Even though fixed interest rates are still good … there are not too many customers out there," Magen said. "I think the market has reached its bottom, it will keep adjusting itself just a few more months, than maybe in one year it will start to come back again."
In Las Vegas, Kiuru said he isn’t sorry to see some lenders go.
"I think it’s just a cleaning process, and the market is taking care of itself by letting (lenders who funded too many risky loans) go bankrupt," Kiuru said.
"In the future, I think the government should regulate the mortgage business a little bit more strictly," Kiuru said, including a national licensing system for brokers. While Nevada has its own licensing, other states have weak or no license provisions, meaning "just about anyone can enter the business."
National licensing, along with continuing education requirements like those for Realtors, "would eliminate some of these problems that came up with the subprime thing," Kiuru said.
Kiuru said investors can also use their interest in other properties to improve their chances of qualifying for a loan.
"If you have a couple properties with equity, you can play with that," he said.
Kiuru said he works with about eight lenders, with the only recent changes in the lineup the addition of Countrywide Financial Corp. a month ago and the loss of Aegis Mortgage Corp. Aegis, citing ore than $600 million in debts to creditors, filed for Chapter 11 bankruptcy protection in August.
With lenders more reluctant to make piggyback loans, private mortgage insurance — usually required on first mortgages with down payments less than 20 percent — is making a comeback, Kiuru said.
"It’s funny how the market shifts and certain things roar back," he said. "That’s what the market economy is all about."