May 2008 Update 

The mortgage market is still changing on a month to month basis. The good news is some of the worst of the worst mortgage offenders are being driven out of the market by the increased public, media, and government scrutiny of the mortgage industry. There is still a great deal of deceptive advertising, phony rate quotes and uncompetitive deals out there, so shoppers must still do their homework. Many of the most serious offenders however, brokers and bankers who commit the most openly fraudulent acts, such as duping consumers into signing inflated good faith estimates or bumping up rates and fees at the last minute at the closing table seem to have been largely driven out of the marketplace for the time being. Tactics that were once largely kept hidden from the public eye are being much more readily exposed in the mainstream media. Rate gouging still frequently and regularly happens but inflated yield spreads of 4,5 or 6 points are less commonplace than they were from 2002 to late 2006. The unscrupulous bankers and brokers out there seem to be aiming for 2.5 to 3 points (gross profit margins) instead. Still very, very high and uncompetitive, with much more room for improvement but a noticeable difference from the outrageous ratelock, rate pumping games of the previous years. It still remains to be seen whether greater competition for less business in the long run will cause many previously unscrupulous brokers and bankers to be even more honest or whether they will just adopt new tactics and adjust to the changing situation in order to continue gouging consumers.

The bad news for consumers is coming from the approval front. Lenders are continuing to tighten standards, approvals, are getting tougher, and many banks are increasingly cherry picking the best applications. Stated Income and lighter documentation mortgages are become more and more rare. Continually falling house prices are making many lenders much more conservative and rates are becoming much more sensitive to credit scores. Before the 2007/2008 credit crisis there was less variation in Full Doc mortgage rates for a 620, 640 or 680 Fico score. Today with the increased tightening of credit a consumer with a 620 score is most likely going to pay a few 1/8s of a percent more than someone with a 680 or 700 score.

LoanShoppingPros is still staying on top of an increasing difficult market and we can still help direct you to the more competitive bankers and brokers out there.

January 2008 Update

2007 and 2008 have seen many upheavals and continual change in the mortgage market. The first to be affected were dozens of subprime lenders whose bankruptcies wrecked investor confidence in the secondary mortgage market (where mortgages and mortgage backed securities are sold between lenders and other institutional investors) causing huge ripples into other mortgage sectors (from Alt-A stated income and no doc loans all the way to AAA full doc) and the economy in general. Many underlying problems which were known in a variety of mortgage circles for the past few years but generally unknown to the public manifested themselves into one big converging crisis.

There were many factors which led to the crisis including:

1. Hundreds of billions of dollars of short term 2/28,3/27,5/25 adjustable rate mortgages which are due to reset to higher rates in 2008, 2009, 2010, etc. Most of the borrowers are individuals with poor credit histories who originally thought they would be able refinance into a lower fixed rate mortgage before their original loans reset or simply were ill advised or had not fully thought through what they were getting themselves into.

2. Intense competition among lenders which led to increasingly more relaxed underwriting standards in order to get more applications and grab greater market share.

3. A housing market where prices started to level off or go into decline. Continual year over year appreciation from 2001 to 2006 contributed to more relaxed lending guidelines. As long as housing prices continued to rise, very small or zero down payments were less of an issue. Declining housing markets also make it more difficult for subprime borrowers whose credit has improved to refinance into a better rate conventional mortgage.

4. Bad sales tactics among many brokers, bankers and loan officers who put a quick buck above all else. Many consumers were put into more exotic loan products such as interest only loans, neg am mortgages and short term 2/28 or 3/27 adjustables which they did not understand.

5. Outright fraud (fake documentation, overly inflated appraisals), poorly trained loan officers, overemphasis on sales and not properly qualifying borrowers by many lenders and brokers. Stated Income and No Doc programs were especially abused resulting in larger and larger numbers of early payment defaults in 2006.

6. Increasingly there is a focus on the relationship between investment banks and Wall Street ratings agencies whose job it was to evaluate the riskiness of pools/tranches of mortgage backed securities. Ratings agencies are being increasingly accused of giving mortgage securities ratings higher than they initially deserved (the agencies claim they were under market pressure by Wall Street investment banks who bring them the securities to evaluate) or of being slow to react to problems when they were discovered. Mass downgrades of mortgage backed securities by Moody's, Standard and Poor's, Fitch from April to July (and beyond) of 2007 caused investors to question the inherent safety of all residential mortgage backed securities and flee the market. The result is that investors who bought mortgage backed securities and helped provide billions in financing which would not have been possible without them (through the securitization of mortgages on the secondary market) no longer have confidence in the underlying collateral which was once thought of as being very safe (or the risk adequately managed by higher rates for less than perfect borrowers and mortgage insurance on high LTV loans). Without investor buying bonds there is much less capital available to continue funding many type of mortgage products.

7. Wall Street investment banks are also under fire for a variety of other reasons. Investment banks made a huge amount of money in fees from the packaging of individual mortgages into large pools of mortgage backed securities. In many ways they set the guidelines for the type of loans they would package, especially in the Subprime and Alt-A arena. This in turn is being seen as having contributed to declining and less stringent underwriting standards among lenders over time. Eager to keep a pipeline of securities flowing to investors who were attracted to the higher yields over other types of bonds and treasuries, investment banks are accused of increasingly accepting lower quality loans into mortgage pools in order to keep the securitization machine rolling and feed investor hunger for higher investment yields. Lenders gradually became less focused on truly assessing a borrower's risk and instead became focused on originating more loans to sell to investment banks.

The scope, consequences and fallout of many different aspects of the crisis will be continually debated and reevaluated for quite some time. There is already a tremendous amount of debate in media, government and business circles. For individuals who are not mortgage industry insiders a great deal of this may be too much to follow. The industry itself is in a continual state of change that will probably continue for much of the forseeable future. Instead of overwhelming you with too much information, we'll break down what it means for you as a consumer. First time homebuyers may not notice a difference between 2008 or for example 2004 or 2005 because they have no prior mortgage shopping experience to compare it too. Borrowers who have bought homes before or need to refinance and were used too much easier qualifying will find this more useful and the changes more dramatic. If they have good memories or easily qualified for a Stated Income/Reduced Doc/No Doc mortgage in the past, the current changes will seem quite different, some would even say drastic. The mortgage market has changed significantly for some type of borrowers.

For the time being what the 2007/2008 mortgage crisis will mean for many mortgage shoppers:

1. Greater scrutiny and verification of documentation with fewer alternative documentation type mortgages available (Stated Income, No Docs, etc). Greater cherry picking from banks for the most qualified borrowers.

2. Bigger down payments on many loan programs with exceptions on such as FHA and a few other Full Doc programs. Many 97 to 100% financing products are gone. Much bigger down payments on No Docs (if they are available at all).

3. Because many investors who use to buy mortgage backed bonds have been scared away from the market, a shortage of invested capital (and a perception of greater risk) will keep some rate spreads on non-conforming loans (Jumbos and Alt-A mortgages not within FNMA limits) higher than before the crisis started. Example a typical rate spread on a jumbo as opposed to a Full Doc conforming before the mid 2007 meltdown was 1/4% or 3/8%. After the crisis began it reached 1% or more at some banks.

4. For borrowers with less than perfect credit, far fewer subprime (almost none) loan options.

Overall, there is a tightening of credit standards although for many borrowers the situation is not as hopeless (prudent buyers can still get mortgages) as it sounds in the media (subprime a major exception) for the time being. More ARMs are still due to reset in 2008 and 2009, however, which may lead to greater deliquencies and foreclosures. Other factors such as increase in unemployment, higher oil prices, and a broader general economic downturn could lead too, combined with more foreclosures, a further decline in house values which could put lenders into an even more difficult position in late 2008 and 2009 . Most of the lending changes have been common sense (far fewer low down payment No Doc or Stated Income programs) and geared towards curbing the excesses of 2001 to 2007. There is still more flexibility in the lending market today versus the 80's or early 90's and many borrowers will still be able to afford to enjoy the benefits of home ownership if the plan their purchases carefully and do not overextend themselves by buying more home than they can afford. Staying on top of and continually improving your credit as well as informing yourself of how other mortgage qualifying factors (click here), such as your DTI (debt to income) ratio, LTV, cash reserves, employment relate to another, should allow you to stay ahead of the game and make a prudent purchase decision