Changes In The Mortgage Industry

I want to alert you all to MAJOR changes in the mortgage industry.  I'm sure you all have seen articles, news, e-mails, etc. about mortgage companies closing their doors.  It is happening everywhere.  In fact, several of lenders are now out of business.  Why?  Read on for a segment of a March 1, 2007 article from the Wall Street Journal:

"At issue are mortgages made to people who fall in the gray area between "prime" (borrowers considered the best credit risks) and "sub-prime" (borrowers considered the greatest credit risks). A record $400 billion of these midlevel loans -- which are known in the industry as "Alt-A" mortgages -- were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16% of mortgage originations last year and sub-prime loans an additional 24%.

The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance. Loans taken by investors buying homes they don't plan to occupy themselves can also fall into the Alt-A category.

Borrowers who take out Alt-A mortgages are considered less risky than sub-prime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble.

Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. "The credit deterioration has been almost parallel to what's been happening in the sub-prime market," says UBS mortgage analyst David Liu. The UBS report contrasts with testimony Federal Reserve Board Chairman Ben Bernanke gave to Congress yesterday. "Our assessment is that there's not much indication that sub-prime issues have spread into the broader mortgage market," Mr. Bernanke said.

To be sure, defaults have remained very low in the prime market -- and despite the up-tick in bad loans, the problems in the Alt-A sector aren't as severe as those that have roiled the sub-prime market. Some 2.4% of Alt-A loans are at least 60 days past due, according to UBS, which looked at mortgages that were packaged into securities and sold to investors. That is well below the 10.5% delinquency rate for sub-prime mortgages. (During the housing boom, delinquencies were low for all types of loans because borrowers who wound up in trouble could refinance or sell.)"

Therefore, it is wise to let experienced loan officers talk to your clients about mortgage financing because our regulations and underwriting decisions are changing daily.