Borrowers Are Feeling Some Heat, but It's Not a 'Mortgage Meltdown'

By Kenneth R. Harney
Saturday, September 29, 2007

The term "mortgage meltdown" has become so common -- on TV, in headlines and in casual conversations -- that you might assume that this is a tough time to get a mortgage.

But the reality is starkly different: Mortgage money is plentiful; the majority of mortgage products remain relatively unaffected by troubles in the subprime segment; and interest rates for 30-year, fixed-rate loans remain in the low 6 percent range for people with reasonably good -- not necessarily perfect -- credit records.

Even interest rates on jumbo loans -- those for more than $417,000 -- have fallen after spiking this summer.

The main change over the past several months is that "the products and underwriting that allowed people to buy houses they couldn't afford have disappeared," said Ted Grose, president of 1st Mortgage Advisors in Los Angeles.

Nonetheless, lenders and brokers say, there is a widespread and persistent belief by consumers that the entire mortgage market is in crisis.

Kit Crowne, a loan officer with Right Trac Financial Group in Manchester, Conn., said even sophisticated homeowners with high incomes are under this impression. He recently handled a relocation financing for a professional couple moving from New Jersey to Connecticut. During the initial discussion, according to Crowne, one spouse said: "I'm really not sure that we're going to be able to even qualify for a mortgage. We've got a lot of graduate and dental school loan debt -- and I hear it's a terrible time in the mortgage market."

Crowne checked the couple's credit and verified assets and put them into a cream-puff fixed-rate first mortgage at 6.25 percent for 30 years. "You'd be amazed," he said, "at how often we run into this" pessimism -- even though rates are lower than they were midsummer.

Jumbo mortgages, which always have carried higher rates than "conforming" loans, or loans eligible for purchase by Fannie Mae and Freddie Mac, have recently been in the low 7 percent range, according to Crowne, down from 8 percent and higher a couple of months ago.

In Everett, Wash., Jim Brown, chief executive of Veteran Mortgage, agreed that "the 'mortgage meltdown' idea is way overstated." Even in his part of the country, where home prices are rising, "a lot of people think that the mortgage market is in much worse shape" than it actually is.

"Other than subprime and high-LTV [loan-to-value ratio] stated-income" programs, he said, "we've got pretty much everything now that we did before. We've got a lot of outlets." For example, Brown's company offers buyers with limited resources five loan programs that allow zero down payments and fixed rates of 6 percent to 6.25 percent.

Most lenders and investors are quick to note that, while mortgage money is plentiful, underwriting standards are more strict than they were a year ago. Jumbo loans, for example, often require two appraisals -- one by an appraiser selected by the lender and the other by one working for the investor.

"And they better line up," Crowne said, or they won't do the deal.

Similarly, FICO credit-score standards generally are higher than a year ago, stated-income mortgages with no verifications are hard to find and major investors are on the prowl for anything hinting at fraud. Lenders and investors are especially wary of excessive "layering of risk" -- combining low down payments with marginal credit scores and high debt-to-income ratios -- in markets where prices are trending lower.

A major legislative development underway on Capitol Hill could expand consumers' range of mortgage choices even further: Congress appears to be on the verge of transforming the once-stodgy Federal Housing Administration program into a competitive home loan option nationwide, with lower minimum down payments and maximum mortgage amounts generous enough to fund loans in pricey California.

Under a bill passed by the House on Sept. 18, FHA loans could go as high as 125 percent of an area's median home price or 175 percent of the limit for loans purchased by Fannie Mae and Freddie Mac. In California, where the statewide median price is in the mid-$500,000s, that could mean FHA-insured mortgages above $600,000. A companion bill approved by the Senate Banking Committee would cap FHA loans at the Fannie Mae-Freddie Mac limit, currently $417,000.

A key strength of the FHA that many borrowers may not know about is that its funding base is practically bulletproof: Its mortgages are pooled into federally guaranteed bonds issued by the Government National Mortgage Association (Ginnie Mae) and are considered nearly as safe as Treasury securities.

Better yet, FHA loans are consumer-friendly -- no prepayment penalties, flexible and generous for consumers with past credit challenges -- but old-fashioned and strict about documenting income and assets.

Kenneth R. Harney's e-mail address is

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