Vol. 5, Iss. 2, Cover Story: Lending In A Challenging Market

by Chicago Agent

From loan delinquencies to a weakened housing market, the mortgage industry experienced numerous challenges in 2007 and has moved toward more conservative lending practices as a result. Wading through the current mortgage situation might pose as a challenge to some, so we spoke with numerous Chicagoland experts to help you stay afloat. The consensus is that despite the changing market, as always, buyers still want homes and loan options are plentiful. By Meghan Boyer

Currently, it is nearly impossible to turn on the news without hearing the word “mortgage.” After a year of drastic changes that created uncertainty for homebuyers and changed the way Realtors need to approach their business, national headlines have shouted the news that the industry is in flux. While experts predict a turnaround is coming, economic growth will remain slow until late 2008 and into 2009, according to the Mortgage Bankers Association (MBA).

The MBA forecasts purchase mortgage origination will fall by 15 percent to $31 trillion in 2008 from an estimated $1.18 trillion in 2007, before rising roughly five percent in 2009. Total originations also should decline 18 percent in 2008 from an estimated $2.31 trillion in 2007.

The association also predicts total loan originations will drop an additional 6 percent in 2009 from 2008, as the 5 percent increase in purchase originations partially offsets a projected 18 percent decline in refinance originations in 2009.

The mortgage market’s challenges are numerous. Readjustment of interest rates in the subprime market has led to rising foreclosures, more stringent financing regulations and financial difficulties for major lenders because of loan delinquencies and defaults, says Donna Paler, vice president and regional builder sales manager with LaSalle Bank/Bank of America. Additionally, there is weakness in the housing market, with new construction and existing home sales down and inventories up, she notes. Involved in the mortgage business since 1993, Paler has seen more changes and challenges this year than any other.

Though the weaknesses in the housing and mortgage markets continue, the industry is not halted. Real estate agents and lenders are working together to preapprove qualified buyers and sell homes.

“I’d say this market will cause more people to use mortgage and real estate professionals versus the Internet,” says Leslie Struthers, senior loan officer at National City Mortgage, who notes that people always need homes even during times of loan uncertainty. The market “only spotlights the value a real estate professional provides,” she adds.

One of the values agents provide includes assisting consumers in understanding their lending options, which are still varied and plentiful, even for buyers with imperfect credit, says David Hurst, executive vice president at Countrywide Home Loans. “Though access to money to fund home loans has been reduced over the last few months and some loan options have gone away, most homebuyers still have a wide array of choices,” he says.

Jumbo loans and low-down-payment loans are still available, and fixed-rate mortgages and many other loan products are attractively priced, says Hurst. However, industry members agree that the majority of buyers are opting for 30-year fixed mortgages. Interest rates for adjustable-rate mortgages are near fixed-rate levels, which is why few buyers are choosing the adjustable route. Roughly 11 percent of all mortgages for 2007 are adjustable rate, says Hurst, citing a Mortgage Banker’s Association figure.

There are multiple loan options buyers and lenders are not fully informed about, says Brian Knuuttila, senior vice president at Source 1 Mortgage. “So many lenders have limited access to multiple products or are not informed enough on the options that exist,” he says. There is no secret to getting around a client’s credit problems, says Knuuttila. In this market, it takes due diligence and finding the right products for buyers.

Government lending programs include the Veteran’s Administration Loan and the Federal Housing Agency Loan, which are available with little or no down payment, says Hurst. Programs from government-sponsored enterprises, like Fannie Mae and Freddie Mac, are additional options to consider, he adds.

Reverse mortgages, which are good loans for seniors, are getting more attention, says Struthers. Such loans are attractive because they provide stable income that seniors may not have later in life. In addition, home-equity loans can be good options for the right buyers, says Knuuttila. Such loans “became very popular to purchase or even refinance loans with less than 20 percent equity,” he says.

There are not a lot of new mortgage products available, and most changes in product offerings are either in products that are being discontinued or underwriting guidelines being tightened, says Knuuttila. Instead, buyers can expect larger down payments and stricter loan requirements.

Knuuttila predicts the industry will see more loans close again with private mortgage insurance. “Most lenders are taking less risk and are more willing to approve a loan with PMI rather than not,” he notes. Private mortgage insurance, in most cases, is not bad for borrowers when they earn less than $100,000 annually because the insurance is now tax deductible, says Knuuttila.

Struthers agrees: Loan programs that allow 100 percent down without mortgage insurance, the 75/25 or 80/20 loan, are all but extinct. “Most 100-percent loans you’ll see on the streets will have mortgage insurance attached,” she says.

More stringent lending guidelines mean buyers with less-than-perfect credit may have difficulties obtaining loans. “Credit scores of less than 680 for stated [income buyers] don’t fly anymore. Stated investor deals expect to need a score of 700,” says Struthers. Because of changes in the required credit scores on certain loans, buyers with tarnished credit may have difficulties, agrees Hurst.

Down-payment expectations also have changed. For stated-income buyers, the rules used to allow 10 percent down or even less, says Struthers. Now, such a buyer can expect to put 20 percent to 30 percent down regardless of the occupancy. “Stated investor deals are much more closely scrutinized,” she says.

If buyers have credit problems, real estate agents should advise them to raise their scores before buying. It takes work, but credit can be improved, says Hurst. Consumer education Web sites, su
ch as www.homebycountrywide.com, list step-by-step methods for improving credit, he adds.

In the past, buyers were most concerned with getting the best rate on their mortgages, says Paler. Now their concerns center on applying for a mortgage with a reputable lender who is able to advise them on the best products.

“Potential buyers who are disillusioned by media reports and have nearly abandoned their dream of owning a home can gain confidence by better understanding their options and knowing that they can turn to a lender they trust,” adds Hurst. With falling house prices and low interest rates, it can be an ideal time for a first-time buyer to enter the market, he says.

Real estate agents should dispel common misconceptions about the market, Hurst adds. Buyers may be applying national housing information to their region when, in fact, the area is unaffected. Agents should stress housing markets are local, not national.

Not all buyers, though, will be able to get a loan. Those who were approved a year ago may not be approved today, agree the lending professionals. “With the tightening of credit and limited resources for subprime lending, it is more important than ever to spend your time with a qualified buyer,” says Paler.

Agents should gather as much buyer information as possible, including income, assets, spending habits and credit, says Knuuttila. Struthers suggests agents with client concerns should have loan officers put loans through underwriting with a bank instead of signing off on it themselves.

The instability in the market, more strict underwriting guidelines and higher interest rates mean fewer investors overall, though the area is not without potential, says Knuuttila. As foreclosures rise and home values drop, investment properties and second-home buying may spike again. “If I were an agent, I would have my clients pre-approved prior to showing them any homes, but especially investment properties,” he adds.

Flipping, likewise, has slowed. “There is more of a concern for the length of time it will take for the property to sell, thus cutting into the profit of an increased sell price,” says Paler. Knuuttila agrees, “Flippers are going to have a tough time in this market.”

In the short term, agents must realize the banking industry has returned to its conservative roots, with more strict regulations and intensified buyer scrutiny. Despite the change, there is still a need for housing, and industry experts predict the market will turn around toward the end of 2008. “Regardless of who lost money, who’s laying off or [who’s] flat-out closing, people still need homes and we’re still doing mortgages,” says Struthers.

Until the turnaround, Realtors can still flourish. “Just like lenders, those who are professional, knowledgeable, work hard and are visible during this slow time will reap the rewards in the future,” says Paler. “The market will turn around, and you want to be positioned well when it does.”

Knuuttila agrees: “Now is not the time to crawl into a corner; adjust to your market,” he says. “As long as your primary market has not been in the subprime arena, most smart agents and lenders will survive. You just need to be aware of your market and adjust accordingly.” CA


David Hurst
CountryWide Home Loans

Brian Knuuttila
Source 1 Mortgage

Donna Paler
LaSalle/ Bank of America

Leslie Struthers
National City Mortgage

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