Imagine drinking from a fire hose.
That’s what the American consumer is doing with mortgage debt, taking it on in large gulps as the home loan industry pushes every imaginable type of mortgage on every potential borrower.
Expected to reach nearly $1 trillion in mortgage loan activity this year, lenders are anxious to make loans. There are low-down payment loans, there are equity loans for up to 100 percent of a property’s value (perhaps even more), and there are loans for marginal borrowers who don’t qualify for a conventional loan.
There are also special loan programs for immigrants, for borrowers who want financing without disclosing their income and for homeowners who have second homes or investment properties.
The most explosive market is for second-rate borrowers. Each lender has a kind way of describing them such as sub-prime, non-conforming, B and C loans and special consideration loans.
The latest twist is from Norwest Mortgage, which offers a loan “for credit-worthy borrowers denied conventional loans” called “Plus.”
Norwest’s program is targeting individuals who have previously been turned down for a loan. Norwest, one of the country’s leading residential mortgage lenders with about $215 billion worth of home loans, is taking aim at “credit-worthy borrowers who do not meet underwriting guidelines for conventional mortgage products.”
Whatever these loans are called, all major lenders seem to be jumping on the bandwagon.
Last year, Countrywide Funding formed its “Full Spectrum Lending Division” for people with “less-than-perfect” credit history.
Interest rates generally range from one-eighth to three-eighths of a point higher than traditional “A” loans.
The gush of mortgage money, and the ease with which people can get it, is in sharp contrast to what the mortgage market looked like just 25 years ago. Capital for home loans had dried up because of an economic downturn, forcing a national moratorium on mortgage loans.
The major source of home loan funds at the time was passbook savings accounts at local thrifts. When the savings ran dry, so did mortgage money.
That was before the 1980s, when Wall Street began to securitize mortgage loans and before individual loans were recognized more as a commodity than a service by your local thrift.
Today, loans are priced, originated and sold to secondary mortgage giants like Fannie Mae and Freddie Mac just like stocks and bonds. The idea of a moratorium on loans is inconceivable today.
This Wall Street trend also explains the abundance of loans for every imaginable type of home loan. Mortgages can be carefully priced by risk and put in pools, where investors can judge risk and make their decisions accordingly.
In fact, a recent report from American Banker magazine predicted that “the practice of labeling loans as A, B, and C will disappear as lenders sharpen their underwriting skills and become better at pricing.”
Experts say that “sophisticated modeling systems” will dictate terms and rates based on a borrower’s credit and risk in the market. Loans will not have to be categorized.
With this trend will come new ways of underwriting home loans. Instead of loan officers and loan committees making subjective decisions about borrowers, everything is “scored” by the numbers.
Borrowers must meet certain ratios on credit, cash flow and net worth in order to qualify for a loan. Taking people out of the transaction, computers crunch the numbers and make the underwriting decisions.
