Mortgage News

Four times annually, the Federal Reserve surveys 84 banks around the country about general lending standards and banking conditions.

One of the survey questions asks about current mortgage lending standards and whether it’s getting harder, or easier, to get approved for a home loan.

Modified from the report, we see that nearly 80 percent of banks are making it harder for "prime" borrowers to get a mortgage.

This is up from 18 percent a year ago and underscores mortgage lender risk aversion among even the "most qualified" among us.

A six-figure income or impeccable credit is no longer good enough to get you carte blanche with the bank — you’ve got to have the complete package and this chart is your proof of that.

Now, some of the areas in which mortgage guidelines are tightening are well-known:

• More thorough income documentation
• Higher credit score requirements
• Larger downpayment requirements

But most of the areas are less well-known and constantly changing.  They includes the dark corners of mortgage approvals, addressing esoteric items such as:

• Investment property cash flow
• Appraised values and comparable sales
• 30-day delinquencies and credit character

And it’s only expected to get harder. 

So, if you already know you’re buying a home next Spring, talk to a loan officer now and put a purchasing plan in place.  This is especially true if you’re converting your primary residence into an investment unit — more than a few would-be buyers have been burned already by new rules that specifically exclude some types of rental income.

Where 80 percent of banks go, the other 20 percent is likely to follow.  The best way to prepare for these changes is to ask good questions in advance of your actual needs.  That way, you’re planning proactively instead of scrambling reactively for additional downpayment at the 11th hour of your purchase.

Let’s Start With The Conclusion

If you plan to buy a new home in 2008 or 2009, give a lot of thought to moving up your timeframe. 

Mortgage approvals are about to get more scarce and more expensive for everyone.

The Supporting Evidence From The News

1. FHA is increasing its mortgage insurance premiums and up-front loan fees for a lot of borrowers
2. With IndyMac’s demise, other banks should follow and Alt-A loans may go the way of Sub-Prime
3. Fannie and Freddie are in financial crisis again and may be forced to add mandatory loan fees for everyone
4. Banks are doing the unthinkable just to get suspect loans off their books
5. Wall Street is losing its appetite for "guaranteed" mortgage bonds

The Anecdotal Evidence From The Street

1. Lenders have slowed "common sense" exceptions.  Meet the guidelines or else.
2. The new Fannie Mae guidelines are much tougher on high debt ratios
3. Wall Street is scared and rumors are floating about more bank failures
4. The Fed is laying the groundwork for another market intervention.

The Relevant Thoughts From A Guy Who Lives, Eats, And Breathes This Stuff

1. It’s an election year so all we’re going to hear from now until November is bad news about housing, and bad news about oil prices.  That will weigh on Consumer Confidence and should negatively impact mortgage rates.
2. The purge of the Alt-A mortgage market has been a long time coming and now the window is closing.  Don’t get caught watching the paint dry.
3. It doesn’t matter how good mortgage rates get if products keep disappearing.

Parting Wisdom

One reason why the markets have been so volatile is because — about a year ago — the financial models being used by the banks failed them.  Losses followed and swaths of people got fired, but, in the end, lenders still have to lend — it’s what they do. The show must go on, after all.

So, despite the missing roadmap, the banks have still been trying to make it work.  They’re still issuing new loans to mortgage applicants and they’re changing their business rules on-the-fly as market conditions warrant.

However, it’s dangerous to drive without a roadmap.  Every now and again, one of the mortgage lenders drives right off a cliff.  And each time it happens, everybody else on the road slows down, and that trickles down from Wall Street all the way to Main Street.

Therefore, until the path gets more clear for the banks, life as a mortgage applicant should continue to toughen.  It won’t be easier to get a loan in 6 months than it is today so if you plan to buy "sometime soon", maybe "sometime soon" should be upgraded to "sometime sooner".

UPDATE: Listen to a 5-minute radio interview I gave on this post.

(Image courtesy: The Wall Street Journal)