First a little refresher on the lending market.
Lenders loan money to home buyers, then typically sell the loans to investors on the secondary market to obtain more money to lend out. In the past, investors rushed to buy up these Mortgage Backed Securities, seeing them as a safe investment with a nice return. In the rush of cheap money the last few years, some lenders didn’t bother to qualify the people they were lending to. This lack of underwriting, in addition to rising unemployment in the Midwest, pushed defaults and foreclosure rates to record levels. Investors unsure of which securities held bad mortgages stopped buying the securities altogether. This in a nutshell is what lies behind the “Subprime Crisis”.
When investors stopped buying loans, many lenders had no funds to lend out, and many (246 at last count) went out of business. The remaining lenders have tightened guidelines to stabilize the industry, and in hopes of making mortgages attractive again to investors. These steps included eliminating “no document” loans and 80/20 programs, reducing the amount of debt a borrower may carry, raising credit score requirements, and requiring significant down payments in declining markets.
The latest change comes from the mortgage insurance industry. As you may know, mortgage insurance (MI) is required on any loan that exceeds 80% of the homes value. MGIC, a leading MI company, will no longer issue insurance on loans over 97% loan to value (LTV). Going to 97% also requires a credit score above 680. In restricted markets they will only go to 90 – 95% LTV. Restricted markets include the entire states of California and Arizona, and the Tacoma area in our own state. Cash-out refinances and condominiums have further LTV restrictions.
So with mortgage insurance unavailable, lenders will not issue loans above 97% LTV. This of course affects first-time homebuyers the most as many have not saved up for a down payment. This will eliminate more buyers from an already slow real estate market.
Because of the slower market, I imagine lenders will seek to find a way to assist first-time homebuyers, but it may be some time before that happens. In the meantime, homebuyers should concentrate on saving up for a down payment.
