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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2010

New Market Realities Take Hold

Brokers must leap hurdles that underwriting and mortgage-insurance restrictions pose

New Market Realities Take Hold

Conventional mortgage loans have become increasingly more difficult. Not only have agency standards tightened, but mortgage-insurance requirements also have added limitations. With manual restrictions in place, automated-underwriting approval no longer guarantees a loan will be approved for mortgage insurance.

These changes may impact your clients’ ability to get a mortgage as well as the price of that mortgage. Fannie Mae charges lenders a premium for different combinations of loan-to-value ratio (LTV), credit score and loan type. This premium is called the loan-level price adjustment. Freddie Mac has a similar tiered-pricing structure, called post-settlement delivery fees.

Most clients must have credit scores greater than 720 to avoid a credit-based delivery charge or price adjustment. For scores less than 720, price adjustments generally increase steadily for each decrease of about 20 points. Premiums can be as much as 3 percent.

Other additional adjustments exist for special features or properties, such as balloon notes, manufactured homes, investment properties or condominiums. Investment properties have large adjustments, from 1.75 percent to 3.75 percent, depending on the LTV.

Allowable LTVs and agency delivery fees also have tightened significantly for cash-out refinancing. At present, both agencies still allow cash-out refinances. The fees, however, can be as much as 3 percent, depending on the borrowers’ credit scores and the LTV. Then again, mortgage-insurance restrictions largely prohibit cash-out refinancing with LTVs greater than 80 percent.

According to fee schedules published this past year, Freddie Mac no longer will allow agency-approval cash-out refinances with LTVs greater than 80 percent beginning in February. Fannie Mae could have that change in the works, as well. This will be in line with the realities of the availability of mortgage insurance and the standards that existed before automated underwriting.

In some cases, delivery charges can be too large to be paid with premiums from the loan interest rate. For such loans, borrowers must pay the delivery charge at loan closing — an additional difficulty, especially for borrowers who are qualified but have credit scores that require an additional premium adjustment.

Many lenders impose additional restrictions based on their own agreements with the agencies and investors. Condominiums, manufactured housing or credit-score limits generally are areas that may have lender-specific restrictions.

Mortgage-insurance companies place another layer of approval restrictions. The big change here is that before the mortgage-market meltdown, an accurate, automated agency approval generally meant that mortgage insurance would be approved.

Now, mortgage-insurance companies don’t automatically approve loans for mortgage insurance based on the decisions of agency automated underwriting systems.

Further, ineligible programs may include the following:  

  • Manufactured housing 
  • Two- to four-unit properties 
  • Cash-out refinances 
  • Second homes 
  • Investment homes 
  • Nontraditional credit 
  • Limited income or asset documentation 
  • Reserve requirements 
  • Interest-only or negative-amortization loans 
  • Reduced appraisals

Some companies also prohibit all third-party originations. 

Many mortgage-insurance companies also have manual guidelines for borrowers’ debt-to-income ratios (DTIs). Often, the maximum allowable DTI is 41 percent to 45 percent. Manual mortgage-insurance guidelines also can address credit scores, distressed areas and declining markets. Clearly, mortgage-insurance guidelines can render some agency approvals unusable. 

The tightening of agency and mortgage-insurance guidelines stems from the tremendous losses taken since the mortgage crisis began. Freddie Mac posted a $5 billion loss in the third quarter of 2009. Fannie Mae, meanwhile, posted an $18.9 billion loss in the same quarter, and the Federal Housing Finance Agency said Fannie will need $15 billion more from the U.S. Treasury. 

Less publicized are significant mortgage-insurance-company losses. These losses may soon be more evident; Standard & Poor’s announced in November that it would look more closely at mortgage-insurance companies. Possible credit-rating downgrades could further restrict mortgage-insurance availability. These multiple layers of guidelines can make it more difficult for brokers to provide precise initial rate and fee quotes at a time when the U.S. Department of Housing and Urban Development is raising the standard for the accuracy of initial disclosures.

Many qualified buyers are being shunned because of the changing rules. Restrictions on high-risk loans that didn’t consider income, assets or amortizations were and are necessary, but the clampdown seems to have gone too far. In some cases, the rules eliminate families with demonstrable ability to afford a home.

Further, restrictions on cash-out refinancing mean many homeowners can’t finance home-improvement projects, consolidate debt or finance other personal needs because home equity no longer represents a liquid asset. Second mortgages also have become difficult to obtain.

Brokers facing these new and varied agency and mortgage-insurance guidelines can do the following: 

  • Get as much detail from your clients as possible before providing a quote. Explain that many considerations can impact the accuracy of a quote in the current market. 
  • Check lender and mortgage-insurance guidelines early in the loan process. 
  • Be careful to run a detailed mortgage-insurance quote before completing the good-faith estimate. Most mortgage-insurance pricing engines require more information than they did previously, so don’t rely on rate charts.
  • Prepare customers for the possible need to provide more documentation after the lender has reviewed the loan application. 
  • Establish a program to help potential clients improve their credit ratings and to encourage them to be patient in that process. 
  • Develop your marketing strategy in an effort to find better-qualified borrowers.

Despite the changes that already have taken place, additional tightening is likely. Along with higher unemployment, decreased income levels, damaged credit and an ongoing foreclosure epidemic, tightened underwriting standards will result in fewer qualified buyers. Brokers must be better in all areas if they want to find success this year and beyond. 


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