Intense competition in the national mortgage marketplace is producing an unexpected new financial resource for home owners with credit problems or sagging real estate values: A flood of cut-rate loan money, funded by Wall Street investors who once dealt only with cream-puff borrowers.
Mainstream lenders traditionally saw "problem" homeowners as too risky, and local personal-finance companies who did offer loans often had rip-off rates.
During the no-growth 1990s, the ranks of homeowners who have slipped into the problem-credit category have exploded. Corporate downsizing and declines in property values have made refinancing virtually impossible for thousands of otherwise stable borrowers. Large numbers of homeowners are stuck with mortgages at 9%, 10% and 11%, locked out of the biggest refinancing boom in American history.
For such home owners, however, relief appears to be on the way. National and regional lenders have begun teaming up with Wall Street investors to create mortgage capital pools designed expressly to fund problem loans at attractive rates. For example, Nomura Securities International, a Wall Street investment banking firm, has just created a new financing pool--known in the trade as a "conduit"--solely for borrowers with slight to severe credit blemishes. The program works through regional lenders, who seek applications from appropriate borrowers and originate the new mortgages. Nomura packages the loans into bond-like securities and sells pieces of the pool to institutional investors like pension funds.
One of the prime originators for Nomura is Arbor National Mortgage, a large Westbury, N.Y.-based mortgage banking firm with branch offices spread from Arizona to New England. Arbor describes its version of the program as "loans for unconventional borrowers." For Arbor unconventional comes in three gradations: Applicants with relatively minor credit problems during the past 12 months--a couple of late mortgage payments and a credit card late payment of up to 60 days--are considered "Level 1." Borrowers who have paid their mortgage late three or four times during the year, and have had installment-debt late payments of up to 90 days are classified as Level 2. Borrowers with truly bad credit performances--up to six late mortgage payments a year and major problems with consumer debts--are lumped in Level 3.
Borrowers in the first category get the best rates. With a 25% equity stake in the home, a Level 1 refinance applicant could get a 7 1/4% loan with 2 points. (Each point, paid in cash at closing, is the equivalent of 1% of the mortgage amount.) Borrowers at Levels 2 and 3 get rates anywhere from 7 1/2% to 7 7/8% with 2 points--but are expected to have larger equity stakes, up to 40% of the home value. While rates in the 7% range are above the prevailing 6 1/2% to 6 3/4% available to squeaky-clean applicants in the mid-September marketplace, they're far below the 9% to 10% plus 3 to 5 points that credit-impaired home owners frequently are quoted.
Drawbacks? Problem-credit loans like these aren't for everybody. For instance, if you don't have a minimum 25% equity in your home, you don't make the grade. And, although the loans are for 30-year terms, the fixed-rate feature is only for the first five years. Then it converts to a one-year adjustable with payment-increase caps of 2% a year and 6% over the life of the loan.
Theoretically, your 1993 fixed-rate 7 1/4% refinance could turn into a 13 1/4% guzzler in the year 2001.
What if you're a borrower with little or no home equity left because the resale value of your property has fallen below what you originally paid? A new, national conduit program inaugurated this month could be of help. It offers 30-year fixed-rate refinance money at 7 3/4% for qualified borrowers who have as little as zero equity in their homes. The program is run by Pasadena-based Countrywide Mortgage Conduit, an affiliate of Countrywide Funding, the largest independent mortgage banker and servicer in the United States.
A key restriction: You've got to have a solid payment history on your existing mortgage and other credit obligations. Like Nomura, Countrywide will sell its bonds to capital market investors eager to get higher returns for slightly higher risks.
How to tap into the new loan programs if you fit the "problem borrower" profile? Ask mortgage brokers in your area for information on availability and the pros and cons of different financing concepts. Most important, though: If you've stayed on the refinance or new loan sidelines because you're worried about credit or equity complications, get into the game. You could walk away with single-digit money in the 7% to 8% range, despite your problems.