The changing loan landscape: Then vs. now

Fannie Mae. Freddie Mac. Credit crunch. Tightened credit.

In plain English, what does such alphabet soup and euphemisms mean for consumers?

Times have changed, but not as much as all the hoopla would indicate.

Yes, the heyday of home loans without documentation of income or assets is gone. But that puts us back to where we were 10 years ago - - conventional loans are available for borrowers with jobs and 3 percent down.

The market has corrected itself, as it should have, said Pat Libbey, founder of Citiline Mortgage Co.

Credit scores largely determine what interest rate a borrower will pay. FICO numbers are a credit rating which range from 300 to 850 -- and higher is better. The magic number for optimum interest rates is 720 or higher.

Fannie Mae, the Federal National Mortgage Association, has significantly tightened credit requirements in its automated Desktop Underwriter system, said Jon Paukovich, vice president of mortgage lending at Ent Federal Credit Union.

The association, which provides money for conventional home mortgages and buys and packages pools of mortgages from lenders, has added additional percentage points to loans to "compensate for risk" -- especially when credit scores are below 720.

"Gone are the days when a Fannie Mae or Freddie Mac loan was a basic rate and point combination," Paukovich said. "Now it's subject to many variables that could dramatically alter pricing -- upward."

A point equals 1 percent of the loan amount.

Because of the new complex risk-pricing structure, loan pricing can change even after a credit report has been run or during the loan process.

Because of "risk-based pricing," on average, new Fannie Mae guidelines include an extra half point for each range of 20 to 40 in the FICO score that is less than 720.

As of last week, a $250,000 mortgage required proof of income and assets, a 5 percent down payment and a FICO of 675 or higher. The five-year fixed rate was 5.75 percent and the 30-year fixed rate was 6.25 percent.

Generally, a score of 620 or higher is necessary to buy a house, but, of course, the lower the FICO score, the higher the interest rate.

Two years ago, credit in El Paso County was "widely available," and the same loan could be obtained with a 550 FICO score, with no money down and no verification of income or assets.

Also during 2006, a $650,000, 30-year, fixed-rate jumbo or nonconforming loan -- those greater than $417,000 -- had an average interest rate of 6 percent, only 0.25 percent or 0.375 percent higher than a traditional or conforming loan, Paukovich said.

Today, the same jumbo loan has an interest rate of 8 percent, which translates to payments of $892 more per month during the life of the loan.

Two years ago, investors could obtain 100 percent loans based only on "stated income." "Basically, we call them 'liar loans,'" Libbey said. Today, owner-occupied loans require 5 percent down for conventional loans, and investment property loans require 10 percent down.

"The only 100 percent loans these days are Veterans Affairs loans," he said.

Wall Street kept easing mortgage guidelines and offering derivative programs, but that only worked because the real estate market was up, he said.

"You're just asking for a default when the borrower has no blood (no down payment) in the deal," Libbey said.

And once again, the Federal Housing Administration -- which doesn't do "exotic financing," a euphemism for lending to risky borrowers -- is the top lender for first-time homebuyers, with limited cash, just like it was 10 years ago.

"The market has been forced to adjust to common sense underwriting guidelines," he said.

In El Paso County, the "credit crunch" has directly affected home sales, which were down 17.5 percent year-over-year from April 2007 to 2008. During the same period, the average sales price of a home dropped from $253,992 to $235,044, Libbey said.

Keith Waggoner, regional president for Adams Bank & Trust, said that despite the tightening of credit, Adams Mortgage had its best month during May.

And mortgages are still available for borrowers with good credit.

As for governmental entities tightening credit standards, Waggoner said, it should have happened sooner.

"It's like shutting the barn door after the horses are out," he said.

Copyright 2008 Dolan Media Newswires
Provided by ProQuest Information and Learning Company. All rights Reserved.