Mortgage 101 Redux: New Fundamentals for Borrowers
by Sol Skolnick

The real estate and mortgage landscape has been altered by the weakness in the domestic and world credit markets revealed by the deterioration of subprime lending.  In the past two years over two-hundred and fifty lenders have either become insolvent or withdrawn from the residential mortgage business. The resulting changes in regulations, expectations and lending criteria require even the savviest home-owners or real estate investors acquaint themselves with the “new” fundamentals of obtaining residential financing.

Every detail counts.

Lenders have revised their qualifying guidelines and generally require verifiable income and assets for salaried workers but may accept realistically stated income, with verifiable assets, from those who are self-employed for at least two years.  

Underwriters are anticipating that property values will continue to decline and are decreasing loan-to-value (LTV) ratios to protect themselves from potentially over-lending against the value of a property. For example: a lender who may have allowed you to have a first mortgage of 80% LTV of your home’s appraised value and a 10% equity line for loans that equaled 90% combined loan-to-value (CLTV) is likely to have  reduced the maximum CLTV to only 80 or 85%. Here are some of the implications of declining values:

• Purchasers are more likely to need a minimum of 20% for a down payment in order to obtain funding.

• If you are refinancing you need to ascertain the appraised value of your property to make sure that the total that you want to borrow falls within the reduced loan-to-value requirements.

• There may be opportunities for serious investors to purchase multi-family dwellings. These type of non-owner occupied residential properties were the favorite flavor of speculative investors. Many of these speculators bought on the high side of the market and were underfunded. Consequently the values of these kinds of holdings have fallen more quickly than their owner occupied single-family counterparts and may soon represent a value purchase.

Dumbo was an elephant with ears so big that they allowed him to fly but, Jumbo was a mortgage amount that was so big that it could no longer get off the ground.  Mortgage backed securities, a favored instrument for funding loan amounts over $417,000, had become suspect, pushing the interest rates for non-conforming or Jumbo loans to nearly 8%. Conforming loans are those that are funded through Fannie Mae or Freddie Mac and back through the Federal Government. Congress, in response to this escalation in rates authorized a temporary increase of the conforming mortgage limits, (through 12/31/2008) based on the median value of single-family homes, to a maximum of $729,750. This has essentially created three-tiers for interest rates and house value ratios: Conforming for loan amounts up to $417,000 which carries the lowest interest rates and highest LTVs; Temporary Conforming also known as “Agency Jumbo” for loans from $417,001 to $729,750 with rates that are higher than conforming but lower than Jumbos before the new law was enacted; and true Jumbo for amounts that are higher than the temporary Agency limits.