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'Back to basics' in Mortgageland

Mortgage bankers are eagerly going back to basics before Congress makes them.

At the annual convention of the Mortgage Bankers Association, or MBA, the most oft-spoken phrase was "back to basics." No matter what you were doing -- walking past a shoeshine stand, staring mutely at your shoes in an elevator or waiting in line for lunch -- you heard someone uttering "back to basics."

What's the hottest mortgage product today, Doug Duncan? "The 30-year fixed-rate mortgage," Duncan, chief economist for the MBA, said with a tight smile. "It's pretty much anything that's fixed rate and conforming."

In other words, the home loan du jour conforms to standards set by mortgage giants Fannie Mae and Freddie Mac: It isn't a jumbo (a mortgage for more than $417,000), isn't subprime (for a borrower with iffy credit), and doesn't have an adjustable rate. Preferably, the borrower totes a good-size down payment (if buying) or sports serious equity (if refinancing).

If the mortgage business is going back to basics, then, by definition, it wandered away from the basics. Indeed, that's what happened.

The rise of exotic mortgages
In 2003, about 9 percent of mortgages (in dollar terms) were subprime; last year, about one-quarter of mortgages were subprime, according to the Government Accountability Office.
The growth was even more explosive for Alt-A mortgages -- nontraditional home loans for which the borrower doesn't document income or is required to pay only interest and not principal. In 2003, 1-in-50 mortgages were Alt-A; in 2006, they made up about 1-in-6.
Almost half of homebuyers last year made down payments of 5 percent or less, according to Credit Suisse. Hard figures for previous years are difficult to come by, but the consensus in the mortgage industry is that down payments shrank in the early years of the 21st century.

Retro mortgages
Now the housing bubble has burst and home prices are falling. Foreclosures are surging as homeowners fall behind on their mortgage payments and then discover that they owe more than their homes are worth. In response, lenders have pulled back. Subprime loans are drying up, more borrowers are asked to document their incomes, many lenders require bigger down payments than they used to, and jumbo loans are harder to get and have higher rates.

It's as if the mortgage world has gone from cell phones all the way back to rotary-dial landlines. Or, at the very least, back to the days of cell phones that could barely fit in a purse.

"We're getting back to basics. You'll find that the loans that are originated in the last half of 2007 will be very different from what were originated in 2006 and the first half of 2007," said Michael Gross, managing director of loan administration for Countrywide Financial Corp., at a panel discussion from the annual convention of the MBA in Boston.

Mitch Ohlbaum, president of Legend Mortgage in Los Angeles, said: "Twelve months ago, it was sort of 'anything goes.' The rules were slim to none. Everyone was coming out with more aggressive deals every day."

And now? "You will see a return to basics," Ohlbaum said. Mortgage insurance already is making a comeback, and he expects to see more carrybacks, in which the seller lends some of the money. More people will make down payments with money given by their families. "I think we're going back to where 10 percent is going to be the standard" for a down payment, Ohlbaum said.

These are the conditions that today's borrowers can expect.

"There's a great, renewed appreciation for the stable, secure, fixed-rate mortgage, which is still out there," said Susan Wachter, professor of real estate at the University of Pennsylvania's Wharton School of Business.

Next: "When people are scared, they get back to basics."
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