Patient borrowers can still find good loan deals
The sub-prime mortgage crisis is wreaking havoc on the normally predictable home lending market, with rates for even the most credit-worthy borrowers swinging wildly from one day -- and one lender -- to the next. Meanwhile, loan companies are dropping like flies, often leaving borrowers in the lurch.
The turmoil is forcing home buyers, and homeowners looking to refinance, to scramble for new strategies.
“It’s the Wild West of lending out there,” said Jeff Lazerson, president of Mortgage Grader, a Web-based mortgage shopping service. “In 21 years of lending, I’ve never seen it this bad. It’s scary.”
A few signs of the tumult: Loan rates, normally tied to the cost of a 10-year Treasury note, have become suddenly disconnected. Late last week, when rates for “conforming” loans -- those under $417,000 -- were dropping, the cost of larger, “jumbo,” loans was soaring. And individual lenders were quoting rates all over the map.
For instance, Countrywide Financial Inc. was offering jumbo loans for 6.75% on Monday. Bank of America quoted a jumbo loan rate of 7.875% the same day, effectively pricing itself out of the California market, where 38% of loans are jumbos. By Tuesday morning, Lazerson said, BofA was offering a considerably lower rate, but Wells Fargo had hiked its rate.
Adding to the chaos, some large lenders -- HomeBanc, Luminent Mortgage Capital Inc. and Impac Mortgage Holdings Inc. -- said Tuesday they were short of cash and would halt or cut back on lending.
A day earlier, American Home Mortgage Investment Corp. filed for bankruptcy protection from creditors. These companies add to a pile-up of roughly 70 lenders that have ceased doing business in the last six months.
Some lenders that scale back or fold may still fund loans that are already in the pipeline, but others won’t, leaving borrowers scrambling, said Greg Nierenberg, branch manager at Approved Capital Mortgage in Woodland Hills.
“For borrowers, it’s a white-knuckle ride,” he said.
How can borrowers handle today’s manic market? Advice from the experts:
Shop
It’s always been important to shop around, but never more than today, said Greg McBride, financial analyst with BankRate.com. There’s a wide range in loan rates, particularly for those over $417,000. On Tuesday, banks listed on BankRate were quoting rates from 6.4% to 8.1% for a $500,000, 30-year, fixed-rate mortgage for a credit-worthy borrower in Los Angeles.
That difference is more than pocket change. At 6.4%, this borrower would pay $3,127.53 a month versus $3,703.74 on an 8.1% loan.
Moreover, rates are increasingly volatile. Nierenberg said one recent day he called the same lender four times in 24 hours to shop one consumer’s loan. Each time, the rate was different.
“It went from 7% to 8.875% to 8.65% to 8.75%,” he said. “It’s just chaos.”
Nierenberg suggests that borrowers have two loan agents shop for them to ensure they get a wide array of quotes and the best deal.
Lock
Most lenders allow consumers to lock in a rate for a set period of time, usually 30 days. Consumers can lock in the day they apply, or wait until later in the loan process, Nierenberg said. Normally, the downside to locking in immediately is that the consumer could miss out on a lower rate later. (Although some lenders will reduce your rate if they fall after you lock.)
Today, with lenders folding left and right, Lazerson said it was imperative to get an approval, a rate lock and a good-faith estimate of closing costs immediately -- and in writing.
“If you have those three things, you can be pretty certain that the loan will go through,” he said. “If you don’t, you’re taking a chance.”
Conform
Standard borrowers -- meaning those with good credit, a 20% down payment and a loan amount under $417,000 -- have little trouble finding plenty of lenders competing for their business, McBride said. As a result, rates for these loans are considerably lower. The average rate for such a loan last week was 6.22%.
But boost the loan amount over $417,000 and the average rate jumps to 6.8%, he said.
If a borrower doesn’t meet standard “good credit” guidelines -- a FICO credit score below 660 -- or if he has a down payment of just 5% or 10%, he’ll pay even more, Lazerson added. How much more varies dramatically based on the borrower’s exact credit score and how much he’s borrowing.
A good credit risk borrowing up to 90% of a home’s value, could still find a rate in the 7% to 8% range. Someone with a poor credit score who puts only 5% down would pay more than 10%.
Split
The average California borrower took out a $436,749 mortgage during the first half of 2007, according to DataQuick Information Services -- just $19,749 over the conforming loan limit.
In some cases, this average borrower would have been smarter to take out two loans -- a first mortgage for $417,000 and a second for the remaining $19,749 -- said Lazerson of Mortgage Grader. That would allow the borrower to secure a lower rate on the bulk of the loan and then either pay down the second, which is presumably at a higher rate, or refinance it later.
The caveat: You’ve got to do the math. If the rate on the second mortgage is considerably higher than on the first, it might be cheaper to get just one loan. Also, you can’t count on refinancing at a lower rate, so unless you have a fixed-rate second mortgage, you’d better have a contingency plan to pay off that loan quickly if interest rates rise.
Wait
What’s making today’s market for big loans particularly volatile is the so-called secondary market for loans, said Mike Hegna, regional mortgage executive for Southern California at Bank of America.
Most lenders resell the mortgages they originate to investors. When investors in this secondary market get nervous about borrowers’ ability to repay their loans, they demand a higher return -- thus a higher interest rate on the loan. At the moment, any nonstandard risk, whether that’s because of a small down payment or a big loan balance, is spooking investors and driving up loan rates, McBride said.
That’s happening even though there’s no indication that credit-worthy borrowers with high-balance loans are any less likely to repay than those with conforming loans, he said.
“This is an overreaction that’s going to straighten itself out,” he predicted.
Other experts agree, but there’s no consensus on when calm will return to the market.
“Yes, it will get better,” Hegna said. “Will it be six weeks or six months? I have no idea.”
In the meantime, interest rates could rise for other reasons, he said.
His advice: Know your loan and what you can handle. If you have an adjustable-rate loan that’s likely to re-price in 60 days or less, you probably need to act now. But, if there’s no reason you must refinance or buy a home today, it might make sense to wait.
Negotiate
Prospective home buyers are likely to find increasingly anxious sellers, who might be willing to accept less for their house or agree to finance a portion of the purchase price, Lazerson said.
“I think you are going to see increasingly desperate sellers out there,” he said. “If you can manage not to get emotionally attached to a house, I think you can get yourself a screaming deal.”
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Mortgage loan lingo
You’ve heard about the sub-prime mortgage crisis, but don’t understand what a sub-prime loan is and why it’s problematic? Here’s a glossary to help.
Standard mortgage
A loan made to a borrower who provides details of his income and assets to the lender; has a Fair Isaac (FICO) credit score of 660 or better; and has a down payment of at least 20%.
Sub-prime mortgage
A loan made to a borrower with a poor credit history, who may be borrowing more than 80% of the home’s value. These loans typically demand higher interest rates because there’s a greater chance that the borrower will default.
Alt-A mortgage
This describes any loan to a borrower with atypical credit. It could be a loan offered to someone with a good credit score but who is unable to document his income. Or it could be an atypical loan, such as an interest-only or “option ARM” -- an adjustable-rate mortgage that gives the borrower flexibility on how much to pay each month. These loans are also somewhat more expensive than a standard mortgage.
Note: Standard, sub-prime and Alt-A mortgages may be of any dollar amount.
Conforming loan
A loan that meets certain lending standards set by mortgage giants Fannie Mae (Federal National Mortgage Assn.) and Freddie Mac (Federal Home Loan Mortgage Corp.). Loans that meet the Fannie Mae and Freddie Mac standards can be pooled and immediately sold to these government-sponsored entities. The most notable of these standards is a “conforming” loan limit, set each year based on average home prices, which is currently at $417,000.
Jumbo loan
Any mortgage with a loan balance above the conforming loan limit. These loans will not be purchased by Fannie Mae or Freddie Mac, but are often pooled and sold to private investors. In a normal market, that makes these loans somewhat more costly than conforming loans. In today’s market, where private investors are increasingly skittish, they can be considerably more expensive.
Source: Times research
