may be better off
sticking with old loan standards
They say good things come to those who wait.
But with home mortgage standards in many instances more relaxed
than ever, borrowers these days don't need to. They can get homes
Some experts caution, however, that consumers
might be better off holding themselves to higher credit and underwriting
standards than their mortgage bankers do. With personal bankruptcy
filings near their highest level ever and late payment and foreclosure
rates on lenient loans either setting two-decade records or hovering
just below them, they say borrowers should follow the old gambler's
adage: Bet with your head, not over it.
"The combination of the competitiveness and
the political climate has really allowed us lenders to become creative
in designing programs," says Eric Burgoon, senior vice president
with Old Kent Financial Corp.'s mortgage division. "You could have
your rental history -- in the case of a first-time home buyer --
you could be late on your rent two times in the last 12 months and
still qualify. You could have delinquencies on credit cards or other
installment loans and, actually, you can even have a bankruptcy
as long as it was three years ago, and qualify for an 'A-' subprime
As for the troubling default numbers, he adds,
"I think it is a concern and all prudent lenders would see that
as a concern. It's something we monitor very closely."
The housing landscape at the end of the 20th
century is, in some respects, nothing short of spectacular. Mortgage
rates remain near three-decade lows. Construction of new homes and
sales of existing ones have surpassed expectations for months. The
homeownership rate touched a record 66.3 percent in 1998, according
to the Department
of Housing and Urban Development.
Public figures and industry officials are quick
to praise the social stability and revenue boost that comes from
a surge in home buying. But consumers who swallow too much debt
in this era of easy money may live to regret it later. Ruined credit
ratings, calls from collection agencies and even the loss of their
piece of the American Dream can lie ahead, depending on the severity
of the problem. And some troubling statistics suggest borrowers
may already be headed in this direction even as the economy at large
continues to chug along with a full head of steam.
Personal bankruptcy filings soared in the 1990s,
with roughly 350,000 people throwing in the towel during each of
the past seven quarters, according to the American
Bankruptcy Institute. On the mortgage front, the rate at which
people are missing payments by 30, 60 and 90 days or more on some
of the more lenient government loan programs has steadily climbed
(see chart), helping
to drive the U.S. foreclosure rate to a record last year.
By the end of 1998, the number of homes with
delinquent mortgages stood at more than 1 million -- an historic
high -- and more than a quarter of a million were in foreclosure,
according to national statistics from the Mortgage
Bankers Association of America.
Borrowers with the most lenient loans are running
into the most trouble. Consider HUD's Federal Housing Administration,
or FHA, mortgage. It requires a down payment of as little as 3 percent
and features looser debt-to-income qualification standards. In exchange,
the customer pays an insurance premium that goes toward a government
fund that covers the lender in case of default.
borrowers fall into delinquency
By the end of 1998, more than 8.5 percent of FHA borrowers were
at least one month late on their mortgage payments, while almost
2.4 percent of homes were in foreclosure. These are the worst numbers
since at least 1979.
of Veterans Affairs, which offers loans that sometimes don't
require a down payment at all, has had trouble with its mortgages
too. The delinquency rate on VA loans hit a 19-year record of 7.14
percent in the fourth quarter, according to the MBAA. The home foreclosure
rate for VA loans is closing in on 2 percent, a never-before-reached
"You look at the most recent statistics on things
like the FHA delinquency and I think the most recent numbers I saw,
the delinquencies were something like eight and a half percent,"
says Mike Coffey, vice president of expanding markets at Freddie
Mac. "I think that's total delinquency and that's unheard of in
the conventional market."
That has held true to date. The delinquency
rate for the tougher-to-get conventional loans, at 2.79 percent
in the fourth quarter, is relatively low historically, while the
foreclosure rate, at 0.71 percent, is in the middle of its two-decade
range. But the so-called conventional market has undergone radical
changes during the past couple years, and the full effect of today's
lenient standards won't be known for a while.
Conventional (or conforming) loans are those
which meet standards spelled out by Freddie
Mac and Fannie
Mae. The quasi-governmental agencies buy mortgages from lenders,
package them together and sell them off to investors in what is
known as the secondary market.
Under the guidelines of yesteryear, borrowers
had to meet strict underwriting criteria to qualify for these types
of loans. But today, a person with a high debt-to-income ratio,
late loan payments and even a bankruptcy or foreclosure in the past
can qualify for a mortgage.
Consider the following example:
Freddie Mac sends out "Seller Guide" bulletins
to lenders to keep them abreast of regulatory changes. In a June
the agency responded to the question "Why are Freddie Mac's requirements
related to bankruptcy and foreclosure so rigorous?" by writing,
"Bankruptcies continue to rise and the reasons for the upward trend
aren't fully clear. And the number of repeat filers is significant.
This trend, especially coupled with data that show borrowers with
prior bankruptcies are more than four times as likely to go to foreclosure
than borrowers with no prior bankruptcies, is alarming."
This year, however, Freddie Mac changed
its tune. The agency said that beginning May 1, certain borrowers
will be able to get a loan in as few as two years after filing for
bankruptcy. There's fine print involved, and customers need to prove
they've cleaned up their acts, but the bottom line is that financial
troubles that used to knock borrowers out of the conventional marketplace
for 10 years don't necessarily do so anymore.
the money's getting easier
What's behind this development? Some cite increasing loan demand
from borrowers and lenders. Others point toward competition among
companies clamoring to get a piece of the mortgage market and pressure
from government officials eager to promote homeownership. The lenders,
for their part, say technological innovations such as their computerized
underwriting systems allow them to relax guidelines without sacrificing
"There are a lot of banks that are out there
that are doing below-market rates, offering closing costs assistance
and doing those types of things to get these loans, No. 1, because
it's good business and No. 2, because they have to," says Marcia
Ramos, vice president and affordable lending manager for Fleet
Financial Group Inc.'s mortgage company. "The demand has definitely
increased and the choice the borrower has has definitely increased.
They are able to shop around for the incentives when previously,
those types of things weren't available."
Regardless of what they can qualify for,
borrowers may benefit by looking at what they should qualify
for instead. Doing so may just provide peace of mind, but it also
might save money or even prevent a financial meltdown.
"The absolute last thing you want is a program
that doesn't properly factor in the borrower's ability to continue
to make the payment," Coffey says. "These are people who are probably
struggling because of past credit problems. They've stretched to
come up with the necessary funds and if something should go wrong,
it's the end of their credit reputation."
steps for borrowers
A first step would be to evaluate whether buying a home with practically
no money down is a good idea. Without the equity cushion that a
20 percent or even 10 percent down payment provides, a borrower
in a depreciating housing market may find he owes more a year or
two after buying than the house is worth. Low down payment loans
require private mortgage insurance in many cases too, so not having
money saved up will raise the cost of the monthly payment. Because
of these concerns, Fleet's Ramos recommends taking a home buying
class, something many nonprofit and community groups offer.
When it comes to subprime loans, where credit
history is more of a concern than amassing a down payment, every
little step somebody takes can help, according to Burgoon of Old
For one, he suggests not letting a 30-day late
payment turn into a 60- or 90-day delinquency because each type
is progressively worse. Time also tends to heal all wounds, so waiting
a little bit longer for a loan can be a wise move, especially if
a late payment is nearing an anniversary. Lenders tend to look at
whether a problem occurred in the last 12, 24 or even 48 months,
so a consumer may be able to get a better mortgage rate by waiting
until a year after a late loan payment rather than, say, 10 months.
"To the extent that they can have their credit
be clean for 12 months, it will certainly help," Burgoon says. "If
they can do that for 12 straight months, that will allow you to
get into at least an A-, if not a conforming, loan. That will save
them a considerable amount of interest."
Borrowers might also want to save up a couple
months worth of mortgage payments to protect themselves in the event
of a job loss or other problem. With many Fannie Mae and Freddie
Mac loans, this requirement has gone the way of the dinosaur, but
adhering to it might come in handy if the economy hiccups.
As for the future, experts think consumers will
likely be able to get loans with even less hassle. They say the
increasing use of computerized underwriting tools and an economic
environment that remains favorable will entice lenders to a larger
pool of applicants.
"Clearly, as we move the (loan-to-value ratio)
up and we start expanding on weaker credit, it raises the risk inherent
in the loan," says Paul Fischer, senior vice president for risk
management at CMAC
Investment Corp. The Philadelphia-based company underwrites
the private mortgage insurance coverage that accompanies high loan-to-value,
or low down payment, mortgages. "But I think the offset that everybody's
gotten comfortable with is higher pricing on those products. The
expansion in the subprime market basically occurred because they
were able to price up for the risk."
Noting that lenient loan programs and computerized
scoring have helped boost homeownership among minority and low-income
borrowers, Fischer says the benefits of moving in that direction
outweigh the drawbacks.
"It's allowed us to expand our view of the marketplace,"
he adds. "Everybody's in the game."
- Posted: March 25,