WHY MORTGAGES ARE HARD TO GET.

Until recently, lenders relied on short term credit from investors to fund their loans. Once the transactions closed, they then sold those loans back to investors under various financial instruments. These investors were willing to take more risks because of the high returns and also because they were not as regulated as banks. These practices led the growth of the sub prime market where credit standards, income verification and assets requirements were less stringent. This also led to high foreclosures due to the influx of non traditional borrowers who began defaulting on their payments.

Spooked by huge loses, investors pulled from the market: no more generous warehouse lines to fund risky loans and tougher guidelines for all new loans.
During the recent boom, traditional institutions such as Freddie Mac, Fannie Mae, FHA actually saw their market shares of mortgage origination fall. Their guidelines prevented them to compete with the new players: Fha for instance requires a minimum down payment of 3% of the purchase price and complete income documentation and is only available to owner occupants. Fannie and Freddie have a statutory limit of $417,000 for one unit properties which keeps them out of the jumbo market. In addition to the limit imposed on them, Fannie and Freddie also have a long list of requirements such as down payment, income verification, employment history that must be met. Because of these restrictions, these institutions experience lower foreclosures rates than sub prime loans: Fha has less than 4% versus 9% for sub prime loans.

The role of traditional lenders is increasing day by day since investors have left the mortgage market: Countrywide for instance is using its own bank to fund over 80% of his loans now compared to less than 45% previously. This shift is explained by the fact that banks get deposits that are a more reliable source of funds and banks can get "advances" from the Home Loan, a Federal institution.

The warning to would be borrowers today is to be prepared to document their income, employment, assets and to make sure that their credit report is as good as it can be. Errors have to be corrected and blemishes must be explained, this is the new reality.
Write to John Palla at jpallaa@gmail.com