mortgage

The Perfect storm Continues

By Bill Starrels

July 2008

The mortgage industry still resembles the Wild West these days. Good news is scarce. As one banker told me in a recent meeting, the industry is experiencing a “perfect storm.”

Mortgage product offerings continue to dwindle. Among loan products that are vanishing are most low or reduced documentation loan products. Gone are high loan to value (LTV) jumbo products. High LTV super jumbo loans are a distant memory.

Underwriting standards are getting tighter by the week. Ratios are tightening. The ratio that the underwriters are concerned about is the amount of a borrower’s income that is required to pay the housing costs. (As an example, if a borrower earns $10,000 a month and the housing expenses including minimum monthly debts equal $3,500 the ratio would equal 35%).

At this time underwriters are looking for ratios no higher than 45%. Depending on the loan product being underwritten, the allowable ratios can be higher if a client has excellent credit scores and reserves.

Interest rates continue to resemble the instability of the Atlantic Ocean in the midst of a storm. On some days the mortgage rates have changed three times in one day! This means that a potential client can get a quote at 9:00 AM that barely resembles the updated quote at 5:00 PM.

Adding more uncertainty to the markets are the news stories on the financial stability of mortgage giants Fannie Mae and Freddie Mac. Fannie and Freddie, as they are referred to in the industry, provide the money necessary for the majority of non FHA backed mortgages to the industry.

The catalyst for the panic in Freddie Mac and Fannie Mae was a report by an analyst of Lehman Brothers which stated that Freddie and Fannie may have to raise a combined $75 billion under a proposed new accounting rule. Most reports stated it was unlikely the rule would ever apply to Freddie and Fannie. However, the damage was done and the stocks of both companies spiraled down.

The Secretary of the Treasury, Henry M. Paulson Jr. held a special press conference at the Department of the Treasury late on Sunday July 13. The Secretary spoke to the stability of Fannie and Freddie in order to reassure the Asian markets, which were about to start trading and to add confidence for Wall Street and other markets traders.

Mortgage rates started to climb once again due to the uncertainties of the markets and the persistent worry about oil driven inflation.  Inflation numbers were the highest seen in many years due in large part to the huge spike in oil.

The overall economy has not regained its footing yet. Expect volatile interest rates for at least the near term. It will take overall stability in the markets and a calming of the markets in general before mortgage interest rates start to stabilize.

Bill Starrels is a senior loan consultant and he lives in Georgetown. He can be reached at 703 625 7355, Email: bill.starrels@gmail.com