ONLY TWO OPTIONS LEFT

Back in the nineties, if you wanted to get a mortgage, it was either a conventional mortgage from your local savings and loans or a bank. Brokers and all the affordability programs were scarce to non-existent in certain markets. You either got a conventional fixed rate with a significant down payment or you went with a FHA insured mortgage when your down payment was less than 5% and your credit scores were low. FHA insured had such low limits that they attracted only less affluent property buyers. All this changed with the proliferation of brokerage firms and the arrival of deregulation. Savings and Loans and Banks lost their monopoly in mortgage origination. The majority of loan origination was passed to brokerage firms.

The Subprime Revolution.

With programs such as stated income, Option Arms, 100% financing, interest only and 80/20 things really changed. FHA insured mortgages lost ground, Banks no longer mattered and housing sales took of like rockets. As with every new things, mistakes were made along the way. Contrary to popular opinion, the majority of subprime loans did not end up in foreclosure and the majority of the borrowers were not unsophisticated individuals who were taken advantage of. PMI companies were not big direct players in this environment because the premium rates took risk into consideration. Subprime mortgages were attractive because they bypassed the restrictive requirements of conventional and FHA insured mortgages as well as the artificial distinctions between jumbo and non-jumbo loans.

The Meltdown.

The majority of subprime borrowers understood and were able to refinance into fixed rate mortgage within the the two years or three years window. The downturn in the economy accompanied by lay-offs increased mortgage delinquencies. Foreclosures have always been an integral part of the system, they are not limited to subprime mortgages but their magnitude only increased when job losses and rates resets were factored in. When property values began to fall, the panic brought in a snow ball effect which further clouded the housing picture. Facing losses, lenders reacted by tightening their guidelines and made it almost impossible to refinance.

The two options situation.

Today borrowers face the same conditions as those in the pre-subprime era. PMI companies no longer insure mortgages over 95% loan to value. Credit scores below 700 are suspect for conventional mortgages. Home Equity Lines Of Credit (HELOC) are a thing of the past, worse yet, some lenders are canceling open accounts due to loss of equity. The only two options left are:
1. A FHA insured mortgage with a least 3% down payment and credit scores greater than 580 or 600 or,
2. A conventional mortgage with at least 5% down payment and credit scores greater than 680. Additional fees are applied to FICO scores below 720.

The above explains the high rate of denials: the scores are either too low, the property value does not support the mortgage sought are typical responses. Those mortgages that are "underwater" meaning that the loan amount is higher than the property value. About 10% of the total outstanding mortgages fall into that category. Foreclosing on those loans is the only option left unless the owner decides to continue making those payments.

The Silver Lining.

Buyers have the best of both worlds in this environment: low prices and vast selection. The only thing standing in their way is getting a mortgage approval and, that is the tough part!