You Magazine -

“When in trouble, when in doubt, run in circles, scream and shout!!!”

This old adage seems to apply to the current perception of the mortgage market and because I’ve received dozens of calls about the lending crisis, I’m setting aside the normal monthly newsletter for this September 2007 to focus on – (pause for effect, muffled drum roll, lights dim, voice drops an octave – shudder ) - The Mortgage Lending Crisis….

First, there is bad news. It’s true. There is a crisis. Since late 2006, over 155 of the nation’s lenders have stopped doing business. Most of them catered to a sub-prime market comprised of folks who have credit scores of 600 or less, but even a few of the major “A-paper” players also went out of business or drastically curtailed lending activities.

The causes are many and varied, but in essence it boils down to lenders extending credit to high-risk borrowers and those borrowers defaulting on their mortgage payments. As the default rate rose, lenders and investors became reluctant to both lend money for mortgages or to purchase mortgage-backed securities secured by risky loans. Since their fiduciary responsibility is to make money for owners and shareholders, lenders and investors don’t like to lose money. They stopped buying the riskier securities and lenders were effectively denied access to their back-end market and their revenue stream. The result – the crisis.

It’s a significant crisis and it’s not just limited to the sub-prime lending. A ripple-effect (perhaps, a Tsunami-effect) is running through the world of prime or “A-paper” lending as well and is generating among the prime lenders a major reassessment of risk factors for their loans, e.g., what is the risk in lending 100% of the purchase price to a borrower; what is the risk of loaning a great deal of money to people who cannot verify their income; what is the risk in lending at the Super-Jumbo (over $650K) level; etc. What we’re beginning to experience is the withdrawal or curtailment of a number of mortgage products offered by the prime lender, no matter how credit-worthy, the borrower. That loan for 100% of the purchase price of a new home may no longer be offered, or, if it is offered, it will be offered at a much higher interest rate. Some loans that were routinely processed three months ago can no longer be offered to our clients.

That’s the bad news. However, there still is lots of good news to spread around and moderate the crisis.

• There is still a host of 1^st class banks and investors who want to lend money. The rules are a bit more stringent (and many of us are breathing a sigh of relief that they are), but the money is out there and the vast majority of our buyers are eligible for mortgage loans.
• There is still a host of mortgage products for our clients –from the traditional 30-year fixed rate mortgage, to the 3, 5, 7, and 10-year hybrid adjustable rate mortgages (ARMs), to the esoteric option ARMs, and to the newer Accelerated Payment lines of credit. The products are still here and, if anything, we expect to see the number of products expanding.
• Finally, as of this writing, the mortgage interest rates are still excellent for the vast majority of products. While rates have increased for Jumbo loans (over $417K) during this crisis, the majority of homeowners can still enjoy very competitive rates.

Please keep this good news in mind and please take the gloomy predictions with a large grain of salt. There is still a vibrant, proactive mortgage industry and there is still money available for lending. So, no need to jump and shout – just give us a call if you have any questions.