YOUR MORTGAGE : Hottest Loan Tactics Sinking Some Buyers

They’ve been the hottest marketing techniques in the home mortgage arena for the past two years--especially for first-time buyers:

--Mini down payments that go to 3% or even less;

--Relaxed credit standards, including instant absolution for past non-payment sins on your credit cards or auto loans;

--Superstretch debt-to-income ratios that allow renters to buy a home by devoting unprecedented chunks of their take-home money to credit payments, rather than food or savings.

But new, ominous signs are emerging that easy-loan standards like these may be backfiring. They may be putting lenders--and their customers--into hot water. Consider the fresh research findings provided by two national organizations that closely track how borrowers are performing on their home mortgages.

San Francisco-based Mortgage Information Corp., which monitors the loans of more than 16 million American homeowners through cooperative relationships with large lenders, reports that delinquencies on new mortgages closed in 1994 are rising dramatically.

Dan Feshbach, president of the company, said that 1994-closed loans are “performing three times worse” than those closed the year before. The primary cause: Low down payments--under 20% down--which surged from 20% of total loans in 1993 to 33% of the market in 1994.

Communities with the sharpest increases in the percentage of low-down-payment mortgages, according to Feshbach, are seeing the biggest problems with new borrowers falling behind. Washington, D.C., for example, registered a 68% jump in low-down-payment loans last year and is now experiencing a delinquency rate on those loans 178% higher than the year before. Take a look too at the early-warning signals flashed by another professional pulse-taker of the marketplace. Mortgage Guaranty Insurance Corp. (MGIC), one of the highest-volume insurers of low-down-payment home loans, is worried about the impact of softened loan standards. In new research, executive vice president Gordon H. Steinbach describes recent performance on so-called “affordable” mortgages made to lower and moderate-income buyers. Increasing such loans sharply has been a major priority of the Clinton Administration.

--Borrowers who were granted loans using non-traditional credit file standards--that is, not requiring squeaky-clean credit histories--are falling behind on monthly payments at four times the rate of borrowers approved using traditional credit standards. Borrowers approved with no credit history whatsoever--a technique commonly used to qualify immigrant applicants--are delinquent at eight times the rate of home buyers with standard credit histories.

--Borrowers taking advantage of mini-down-payment programs promoted by many lenders are far more likely to become delinquent than those with larger down payments. Home buyers putting down just 3% of their own funds are defaulting at twice the frequency of buyers with 5% down. Buyers with 10% down payments, in turn, are half as likely to default as those with 5% down payments.

--Home buyers whose debt-to-income ratios go higher than the traditional ceilings are also considerably more likely to fall behind on payments. Loans made to borrowers with more than 33% of monthly household income going to housing-related costs, and more than 38% of income going to all forms of debt, have 60% higher delinquency rates than standard borrowers.

Steinbach, whose research findings were published in the Mortgage Bankers Assn. of America monthly trade journal, said in an interview that politically correct or not, “results like these are just not tolerable.” Not only must lenders and insurance companies like his bear the default and foreclosure losses from non-paying new buyers, “but there are the negative effects on the borrowers themselves. We’re putting people into homes who are not ready and whose financial problems can really wreck their lives.”

Significantly, Steinbach doesn’t want to roll back the clock to the 1980s and scrap the national drive for more affordable home mortgages. He doesn’t advocate a wholesale return to standard underwriting.

Instead, he said, “We need to do a better job of identifying, educating and working with” low- and moderate-income families who are ready to make the financial leap to homeownership. Cultural and religious organizations in central city and minority communities, he said, should be asked to play a far greater role in educating and counseling prospective borrowers in the months prior to application.