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Borrowers, Don't Wait for the Well to Run Dry..Mortgage Money is Harder to Come By

Many Active Rainers have been discussing how the credit crunch is impacting borrowers...Jeff Belonger summed it up very nicely in his featured post today Will Conventional Loans be Just Like the Subprime Mess? He added links to several illuminating posts, so I won't repeat them here.

And now more fuel to the fire....

MGIC, one of the nation's largest mortgage insurance companies, announced plans to limit coverage and increase premiums for higher risk borrowers.

A few of the key points:

MGIC will no longer provide mortgage insurance for borrowers who have a FICO score of less than 575.
Coverage will be limited in states such as California and Florida, where markets have declined severely. The maximum loan to value they will insure will be 95%.
Increased monthly premium rates for layered risk = lower FICO scores combined with high loan to values. This will result in monthly payments becoming out of reach for many borrowers, as the mortgage insurance premium could cost a few hundred dollars per month, or even more.
Only stated loans for self employed borrowers will be insured. W2 employees will not be eligible. This will impact borrowers in states such as Nevada, and even Florida, where folks work jobs with the majority of income from tips.

Read the full article here: MGIC to Limit Coverage, Raise Prices on Riskier Loans

FHA is also proposing adding risk based adjustments to their mortgage insurance premiums. These proposed changes would be in effect in January 2008. For now, the premium is 1.5% of the loan amount in Upfront Mortgage Insurance Premium, and .5% of the loan amount divided into a monthly premium. regardless of the credit score.

For example, on a $300,000 loan, the upfront premium would be $4500 (added to and financed into the loan amount), and the monthly premium payment would be $125. That's one of the reasons FHA loans are so beneficial for qualified borrowers with lower credit scores. With a conventional loan, that mortgage premium for a borrower with a 575 FICO could easily be $300 per month or more. Tim Bradford reports the proposed changes in his post Proposed Change to FHA MIP...

Bottom line is, mortgage money continues to become harder to come by for all but those with strong credit scores. No one has a crystal ball to determine when the "bottom" will hit. However, homebuyers with less than perfect credit may not have the luxury of waiting for the bottom.

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Posted by Cheryl Hale - South Florida Mortgage Lady on 12/08/2007 10:36 PM

Comments (12)

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12 Comments on Borrowers, Don't Wait for the Well to Run Dry..Mortgage Money is Harder to Come By

DEC

2007

Thanks for the post...I agree that money isn't going to be as readily available, but in some instances someone has to be the heavy and say NO if it doesn't make sense. Paige

Paige,

Good point. The last thing we need is more borrowers who cannot make their mortgage payments...if it doesn't make sense the money should not be available. But in the cases where it does make sense, due to extenuating circumstance in the past for example, some qualified borrowers are going to be penalized.

DEC

2007

Cheryl, This is a FANTASTIC Post. Did you place this in Localism? Also I am flagging this to be featured. Hopefully the AR people can realize this post deserves a feature.

Matt,

Thanks so much! And yes, I did post in localism. Consumers need to be aware of all these changes, and it's been my experience that few know. They read the news about the "market", but I'm not sure they realize how their ability to borrow is affected.

DEC

2007

Cheryl,

Thanks! I'm still trrying to untangle the consequences of this move. MGIC will have some effect on my business down the road but I probably won't notice unitl it kills a deal on the edge. The news about FHA, however will have some drastic consequences. If nothing else, one of the nicest things about FHA was the ease with which you can detail costs. "There's a 1.5% upfront MI payment, not counted in APR, which goes along with an FHA loan and your monthly mortgage insurance premium will be .5% of the loan amount, regardless of LTV." It's the kind of calculation you can do with a pen on the back of a napkin at lunch.

I don't even want to think about the money it's going to cost clients who (now) benefit the most from FHA. If this comes to pass, FHA will not be the solution for many clients who we're diverting from subprime now.

Justin,

I agree..one of the good things about FHA is that the MIP is the same regardless of the credit score. Easier to calculate and much less expensive for the borrower. I can just see the DTI issues resulting from these increased premiums.

Sure, the mortgage industry has to make loans that can be sold, but this will eliminate a lot of folks. Maybe we need to go back to manual underwriting to evaluate risk..the credit score doesn't alway tell the whole story. Sure, borrowers need to demonstrate the ability to repay, but we don't need to make it impossible for them.

The FHA changes are "proposed" at this time, so we'll have to see what happens.

DEC

2007

Cheryl ~ Good, relevant post about the importance of not staying stagnant. Nicely done! :)

Sarah,

Thanks for the compliment. There are still too many borrowers out there who think they qualify for the lowest available rates. They are really subprime, but they just don't know it. And those risk based mortgage insurance premiums are going to be pretty hefty. I'm thinking 100% financing may be going away in markets like Florida where the property values continue to decrease.

Get the mortgage money while you can...

JAN

2008

Cheryl - good information, I don't think consumers realize the process of where money comes from on mortgages, but this will help with the education.

Blessings,

Hi Kelly,

You are so right, many consumers don't realize what factors are involved in a mortgage loan approval. They just see the rates advertised and assume they will qualify. They get disappointed when they are told the loan will be more expensive, And, I as a mortgage become the bad guy.

Bottom line in, the higher the risk perceived by the lender, the higher the cost of the loan

JAN

2008

Well it is sure the trends show that it is going to harder for the consumers to cover the requirements but what happens with those who did't make their payments. Those who failed at a certain point. They loose their home?

Alex,

You are correct about the trends. Lenders are being much more cautious.

You asked an excellent question that I am sure is on the mind of many homeowners these days. Based on what I am seeing and hearing, lenders are willing to try to work something out with those who have become delinquent...a foreclosure is very costly for the lender. AND bad for everyone all the way around. The lender prefers to avoid this option. As long as the borrower can demonstrate an ability to repay, the lender may do one of the following:

reduce the interest rate for a few years

allow the borrower to "skip" a few months of payments to get caught up (the "missed" payments are added to the balance of the loan, effectively extending the mortage term a few months)

extend the term of the mortgage from 30 to 40 years

freeze the rate on an adjustable mortgage when the rate has increased to the point that the borrower cannot afford the payment.

The FHA Secure loan is another option..borrowers who have fallen behind due to an adjustable rate increase may qualify to refinance into a lower fixed rate program to reduce their monthly payment.

There is also some proposed legislation that may provide some relief in the form of reduced interest rates to make monthly payments more manageable.

Options are there. It is very important for a borrower who has gotten behind to contact their lender to see what can be done. They should also contact a mortgage professional to see if they qualify for a refinance to reduce the monthly payments. Folks are giving up before they explore their options.

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