Negotiating the Mortgage Market

The Wall Street Journal compiled a list of the land mines you might encounter while negotiating the road to a new mortgage these days. The talking points were derived from various articles from the WSJ and the New York Times. If you're in the market or the business, it's worth taking a look...

* The options are limited for those whose loans are too big for government backing ($417,000 and $729,740, depending where you live.) Smaller lenders and credit unions often can be more flexible because they know their customers and local market better or may have a prior relationship with the borrower. (WSJ)

* The smallest misstep can set back the process. Lenders check credit reports at the beginning and toward the end of the process, any changes are scrutinized and could be cause for dropped financing. A mix-up with a cable bill sent one couple back to the drawing board after the wife’s score dropped. (NYT)

* Even if your credit is spotless, your building may have issues. Many of the buildings in New York City don’t meet Fannie Mae and Freddie Mac guidelines: That some condos carry more insurance, for example. Another catch: A new IRS rule keeps Fannie from acquiring mortgages made in buildings where more than 20 percent of the square footage is commercial. Most of these requirements aren’t new, they are just more of an issue now when Fannie and Freddie are pretty much the only ones willing to buy mortgages from banks. (NYT)

* To qualify for a mortgage, you will need a job and at least two recent pay stubs. You also will be asked for two years of W-2 forms, proof of other assets and either your tax return or a form allowing the lender to get your return from the Internal Revenue Service. That means that items that reduce your adjusted gross income, like business expenses or IRA contributions, can reduce the loan for which you qualify. (WSJ)

* With home prices still falling in many markets, an appraisal below the purchase price puts the deal in jeopardy. That is because a low appraisal means the buyer must come up with more cash or the seller must lower the price to keep the deal alive. (WSJ)

* If you put down between 20% and 25% of the purchase price, you will find yourself in a strange middle ground: You will avoid mortgage insurance, but you will pay extra origination fees because Fannie Mae considers this group to be its highest risk at a time when home prices may decline. (WSJ)

Jumbo MBS Showing Signs of Life

Although players were not named, The New York Times reported yesterday that a few firms were venturing back into mortgage bond market. The mortgage-backed securities market has remained stalled since the housing bubble burst in 2008, sparking the nation’s credit crisis. Outside of the mortgage bonds guaranteed by Fannie Mae and Freddie Mac the MBS investors have sat out participation in the heretofore risky mortgages underlying bonds. But now a new generation of marketable mortgages with squeaky clean underwriting guidelines are re-entering the bond market.

These new scrubbed mortgage-backed securities probably deserve the highest ratings of any bonds in years, but buyers are still wary and sellers are not in the catbird’s seat. As a matter of fact sellers of MBS may face a loss for the time being.

Institutionally generated mortgages may be far less risky than two years ago with larger down payments, strict ratios and more conservative appraisals. But there is still some degree of risk with home prices not yet proven to have found a stable bottom and unemployment showing few signs of substantial relief.

Jumbo loans have been much more difficult for homeowners to acquire and they have carried substantially higher rates than conforming loans. The bonds in the works are generally these non-conforming loans, i.e. jumbo loans, that Fannie and Freddie will not accept. Bonds guaranteed by Fannie and Freddie are paying record low returns and investors are seeking new places to invest. Risk acceptance is making a comeback.

Here’s a glimpse into what the jumbo MBS market looks like today. It’s a start to loosen jumbo financing.

Prospective buyers of new jumbo mortgage-backed securities will want assurances the loans have all the proper documents and proof of income. They’ll probably want borrowers to have put down as much as 40 percent of their own money. And they’ll expect that, even if house prices have dropped since the mortgage was made, the average loan balance is still no more than, say, 60 percent of the property’s value.

What’s more, any deal will have to be over-collateralized to withstand losses on the underlying mortgages of, say, at least 15 percent before investors in even the lowest-rated slug of bonds take any hit at all. New bonds might still need to be priced at a discount to entice buyers.

That poses a problem for institutions working on the deals: under those conditions, they’re likely to lose money. But the cost of reopening a key market could be worth it. While banks might not rush to securitize nonstandard mortgages right now, that should change as the market regains equilibrium. Those who pioneer its rehabilitation will be in line to help bring in future deals. New York Times