Archive for June, 2008
Changing Underwriting Rules: Will You Still Qualify?
The current mortgage landscape is suffering from a series of aftershocks following the mortgage industry’s 2007 major quake. It used to be easy to find the right ingredients for cooking up a solution to whatever financing challenge arose. But that was yesterday. And this ain’t your mama’s kitchen anymore.
Today’s rules are tomorrow’s moldy muffins. And the burning question from one week to the next is: will your approval still be good when you go into Contract?
The Problem with “Overlays”
Aside from constantly changing rules, banks apply their own “overlays” on top of normal lending guidelines. Take this example. FHA rules have this to say about credit:
“Neither the lack of credit nor the borrower’s decision not to use credit may be used as a basis for rejecting the loan application. We also recognize that some prospective borrowers may not have an established credit history. For those borrowers, and for those who do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means…”
Okay, seems reasonable. Some people don’t use credit or they’re young and haven’t acquired much credit. So we build alternative credit. But, here is today’s Chase email:
“Effective June 27, 2008, Chase will no longer accept nontraditional or alternative credit histories for FHA loans. ”
So, alternative credit is fine with FHA but not if your applying for an FHA loan through Chase. You see the problem? And who’s next? Often these notifications are a shot across the bow that other lenders will soon follow suit.
Automated Underwriting, the Non-Standard Standard
Fannie Mae and Freddie Mac both have their proprietary Automated Underwriting Systems (AUS). Fannie Mae’s is called Desktop Underwriter (DU), Freddie Mac’s is Loan Prospector (LP). Each is slightly different and prioritizes risk a little differently. It used to be true that once you had a DU or LP approval, you could take that to any bank and they would accept it as is, confident that they could unload those loans in the secondary market.
These days however, banks have their own AUS engines that overlay more restrictive rules, rendering a direct DU or LP approval questionable if not entirely worthless. It all makes for shaky ground, where an approval this week may not stand next week. And as buyers in Sacramento compete once again for lower priced properties, often taking months to secure a home, the question remains: Will today’s approval still be good tomoorrow ?
read comments (3)It’s all about inflation, at least lately. An occasional positive economic report casting doubts on the weakness of the economy underscored by Fed speak suggesting that inflation is public enemy number 1 has bond traders pulling out their hair. Rates have been steadily rising for the past week or two.
Bernanke spoke last night at a conference on inflation dynamics and downplayed economic concerns, rattling his saber instead at the prospect of food and energy-fueled inflation. His Dallas counterpart this morning echoed the concern, saying he would accept a weaker economy in exchange for a muzzled inflation.
Bond traders did not like the news. The Fannie Mae 5.5% coupon ended the day down over a point. Mortgage rates rose in response.
Despite the weak housing market, or maybe in a strange way because of it, Sacramento has made Kiplinger’s 2008 Top Ten Best Cities to Live, Work, & Play.
If you ask Sacramentans where they are from, you’ll get a surprising array of responses. As a Bay Area transplant myself, it never surprises me to encounter other S.F. Bay Area people who have moved for quality-of-life reasons to this once quiet enclave of rivers, hills, bike trails, and growing number of restaurants, wine bars, theaters, and clubs. After all, we were all driving past the place for years on our way to Tahoe before we ever decided to get off the freeway and explore its tree lined streets. The place doesn’t yield its secrets to those who rush by intent on other destinations.
The ones that catch me off guard are the Sacramentans whose journey began in distant places like Eastern Europe, Southeast Asia, and Scandinavia. How in the heck…? But as they say, it’s a small world, and growing smaller.
In any case, word is out. And it’s no longer accepted as fact that Sacramento’s only attribute is it proximity to interesting places. It has become a destination with lots to do and enjoy. And with the recent deflation of the real estate bubble, it’s more affordable and attractive than ever. Go Sacramento!
Agency Jumbo Pricing Finally Looks Attractive
In the past couple of weeks, mortgage rates associated with the increased conforming loan limits have fallen dramatically. Those rates, previously 100 basis points higher than traditional conforming loans, are now low enough to offer some relief of the type intended by the authors of the Economic Stimulus package. Housing Wire takes a deeper look into this for those who wish to check it out.
Overall, this relief may have occurred too late to help some Sacramento homeowners, where home values have declined so quickly that refinancing is now only a dream fading in the light of this new day. But for others, it may have arrived just in time.
Conforming rates have been flat, hovering around 6.10% at half a point according to Freddie Mac’s weekly survey. With a steepening yield curve, consumers can save shave a half point off their rate by taking a 5/1 ARM, but there aren’t many takers right now given the risk/return ratio.