Simply The Best Loans

Banking regulators recently reported that of the mortgages modified in the U.S. between January 1, 2008 through March 31, 2009, monthly payments for the homeowner increased on 27% of the loans modified and were left unchanged on an additional 27.5%.  Many homeowners have fallen behind in payments due to rising unemployment.  Unemployment figures have reached 12% in some states.  The deflation of home values has caused many homeowners, around 32% nationwide, to be ‘upside-down’ in their mortgages, meaning they owe more than the home would currently sell for.

While modification of home loans that results in lower payments through interest rate reduction can alieviate some of the budget stress on a delinquent homeowner, if the principal balance of the loan is increased, as is the case with most modifications, the borrower may experience additional hardship in the future by having increased his/her overall debt.  If the home value is already deflated and the principal balance is increased, the homeowner may never really recover financially.

First time buyers wanting to take advantage of the $8000 tax credit must contract and close on their new home by 12/1/2009.  While there continue to be persistent rumors that the credit will be extended into next year, until that legislation is passed, borrowers have about another month, at most, where they could potential contract on a home and get their loan closed in time to get the credit.

There is legislation proposed in both the Senate and in the House which extend the credit time-frame and/or expand it to include all borrowers.  It has been a year since the implosion of the mortgage industry with the govenment take-over of Fannie Mae and Freddie Mac, the collapse of Lehman Brothers and many other lending institutions.  The tax credit has been instrumental in bolstering the sales of homes despite rising unemployment.

While we are approaching the slowest sales season for home sales, the holidays and winter months, proponents of extending the tax credit see it as a way to keep the housing market moving forward.  Detractors, however, see rising deficits and increased government spending as problematic for the long-term.

As the legislation stands currently, a first time buyer (defined as someone that has not owned a home in the last 3 years) with an adjusted gross income of $75,000 or less ($150,000 for a married couple) has to contract and close on their home purchase on or before December 1, 2009 to be eligible for the full $8000 credit.

Additional changes in underwriting guidelines apply to a borrower’s tax returns.  As a result of “ongoing concern with fraud and misrepresentations” Fannie Mae is making new requirements concerning lenders obtaining transcripts of a borrower’s tax returns.  The new guideline will require the lender to obtain written permission from the borrower, both at application and closing, to obtain the borrower’s tax transcripts to verify income documentation provided by the borrower with their loan application.

Verification of employment guidelines are also being made.  Previously a lender, if underwriting a loan that has received an approve/eligible through DU, was required to obtain a verbal Verification of Employment (VOE) within 30 days of the closing date.  Since many large corporations have complex and cumbersome Human Resource systems that can take up to 3 weeks to respond to a request for verification of employment, the new guidelines are going to present some serious issues since they require the VOE to be obtained by the lender not more than 10 days prior to closing.

Whether a borrower is applying for his/her first mortgage or fifth, the tightening of underwriting guidelines across the board are making lending more difficult.  Borrowers with superior credit rating are not given any ‘exemptions’ from these underwriting guidelines.  As the holidays approach and fears of recession continuing well into 2010, borrowers are left wondering if getting a new mortgage is even possible. 

There have been numerous cases recently in my own experience where highly qualified borrowers were denied financing based on unreasonable guidelines or a lack of ‘common sense’ underwriting.  When borrowers with superior credit and significant assets can not get financing due to lack of a common sense approach to underwriting then it’s safe to say those less qualified are doomed.  If borrower’s from all walks of life are unable to buy homes, the economic recovery that everyone is desparately seeking will be a long time in coming.

Fannie Mae, which purchases a great majority of the conventional home mortgages currently underwritten in the US, made recent changes in their qualifying guidelines which are the result of “a comprehensive review of current underwriting and eligibility policies with a specific focus on current market conditions.” These include “increased unemployment, stock market fluctuations, and heightened concern about fraud in the mortgage lending process,” in the policy announcement 9-19 from Fannie Mae’s selling guide.

The maximum age of credit documents is reduced for both existing construction and new construction, 30 days reduction for existing (120 to 90) and 60 days reduction for new construction (180 to 120). 

Additionally, Fannie is making dramatic changes in its guidelines for construction financing, especially construction-to-permanent loan programs.  Fannie’s announcement claims this is due to fears of change in a borrower’s financial circumstances during the construction period when utilizing a single-closing loan program.  The most significant change is the lower LTV (loan-to-value) requirements.  Now, if upon the completion of construction, the borrower’s total loan-to-value is not 70% or less, the borrower will be required to go through underwriting and closing a second time.  This change alone can cost the borrower thousands in additional closing expenses.

Lending in the US is already limited to those able to provide extensive documentation as to their income, assets and credit history.  The harder it is for qualified, A+ credit customers to get financing, the longer the economic recovery will take. 

Next, additional changes from Fannie Mae.

Washington Post’s September 7 article “Mortgage Market Bound by Major US Role” by writers, Zackary A. Godfarb and Dina ElBoghdady is an excellent overview of the events and circumstances that led to the mortgage meltdown.  In addition, it gives  the average individual a better understanding of exactly what is at stake as a result of the government’s intervention in salvaging lenders that were on the verge of bankruptcy.

Bottom line, all the bad loans that created this situation are still there, the difference now is taxpayers are now ‘on the hook’ instead of private banks and lending institutions.  The numbers are staggering and the risky loans are still there, they are just backed by the government now. 

When the next wave of foreclosures starts late this year and into early 2010, U.S. taxpayers will ultimately pay the price of the bailout.  What this will mean to an economy already struggling to just to stabilize is anyone’s guess, but it probably won’t be positive.

On July 30, the new Truth-in-Lending (TIL) guidelines went into effect drastically changing the processing of mortgages in this country.  While it has been law for some time that borrowers must receive a Good Faith Estimate and Truth-in-Lending disclosure within 3 days of applying for a new mortgage, the new guidelines require that borrowers receive a new TIL if the APR changes more than .125% during the course of processing the loan.  Re-disclosure requires the borrower to wait at least 7 business days before s/he can close.  (Business days being defined as Monday-Saturday not including any Federal holidays.)