Low rates jump-start refinance activity
The mortgage industry is still suffering the effects of the financial meltdown of last fall.
"The industry is still trying to find its way," explained Larry Bettag, regional vice president for Cherry Creek Mortgage's Illinois, Wisconsin and Minnesota operations, based in St. Charles.
Many of the undercapitalized and less reputable lenders have been weeded out. For example, there were 16,000 licensed loan originators in Wisconsin alone in 2007 and now there are slightly more than 600.
And shortly before leaving office, former President Bush signed a law authorizing the government to buy mortgage-backed securities in order to bring interest rates down and, hopefully, stabilize home prices.
"That move has made it possible for more people to be able to refinance than were able to do so last fall, in some cases avoiding foreclosure and in other cases, just bringing their monthly mortgage payments down," he said.
The boom in refinances has also helped the mortgage industry and its employees. Loan originators are currently keeping busy writing lots of refinancing deals, Bettag said.
But that can't sustain the mortgage industry indefinitely because, Bettag explained, if a mortgage company lives by refinancing, it dies by refinancing.
So the rule of thumb is that lenders try to write four "new purchase" mortgages for every one refinanced mortgage they write. Right now that ratio is totally turned around, Bettag said. Cherry Creek now writes three times as many refinanced mortgages as new purchase mortgages.
How did we end up in this situation?
"There were a lot of irresponsible lenders in the business who didn't do their due diligence. They didn't make sure that the people they were lending to had the ability to repay their loans."
Consequently, the national default rate on mortgages is now 4.2 percent instead of the 0.75 percent that is more typical, Bettag said.
Is it difficult for a qualified buyer to get a mortgage today?
"The new premium loan is an FHA loan, and while the law says that the lack of a credit score is not a reason to deny a loan, the loan must be salable in the market."
So, generally, you now need a minimum credit score of 600 to get an FHA mortgage, Bettag said. In addition, the FHA has constricted the amount of overall debt you can carry and you must have a down payment of at least 3.5 percent. There is also a total loan limit that varies from county to county.
What do you suggest that someone attempting to get a mortgage do to make themselves more attractive to a lender?
"Talk to a licensed mortgage consultant and come up with a plan."
But you also need to get a true snapshot of your credit rating and history. You should also make sure that you are not regularly using more than 50 percent of your credit limit on your credit cards, Bettag said.
"And make sure you have a good down payment and reserves of at least two months worth of mortgage payments. Some lenders even require three to six months worth of reserves.
"You know what they say - everyone is only one or two paychecks away from bankruptcy and lenders now realize they need to protect themselves against that."
What changes have been made in mortgage lending procedures to prevent future difficulties like the current rash of foreclosures?
"Regulators are trying to prevent foreclosures by preventing high-risk loans."
Many states, but not Illinois, are participating in an effort to license mortgage brokers nationally so they can lend in multiple states. But big FDIC-insured lenders like Wells Fargo and Countrywide are exempt from such state licensing requirements.
"Illinois now prohibits 'no document' and 'stated income' mortgages. By law, borrowers must now prove that they have the ability to repay their loans.
"In addition, Cook County has instituted a buyer counseling system, which must be paid for by the lender. Every FHA, Fannie Mae and Freddie Mac loan applied for on a piece of Cook County property must be entered into a Cook County database. If the computer decides that a buyer's financials are questionable, they have to be offered free counseling to let them know what they are getting into."
How will President Obama's stimulus package change the overall mortgage situation?
"No one really knows yet what effect the American Recovery and Reinvestment Act will have because no one really knows what is in it. It seems to be morphing every second.
"I do know that the package includes a tax credit for homebuyers of up to 10 percent of the home's value, not to exceed $8,000, and that is good because they have hopefully realized that the real estate market is what keeps our economy running.
"I also hope that the government continues to buy mortgage-backed securities because that will keep interest rates down."
What do you see in the future of the mortgage industry?
"There will be lots of consolidations. Only companies with great balance sheets will survive and you will even see consolidations among realty companies, which means less competition and benefit for consumers. There will also be more regulations.
"Appraisal rules will also change as of May 1. Lenders will no longer be allowed to speak directly to appraisers because accusations have been made regarding undue pressure on appraisers to come in at a certain amount. So third parties will now have to hire and deal with the appraisers and it will cost more for consumers to even get an idea of how much a piece of property is worth.
"These are challenging times but I believe that the best of the best will rise to the top."