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First off, let me say that it’s great to be in the mortgage loan business. It certainly keeps you on your toes. By now all of you are familiar with the woes of the sub-prime segment of the mortgage loan market. Sub-prime loans are basically high interest rate loans made to individuals who have poor credit. The rates are higher because the risk is greater. We discussed market issues with sub-prime loans here in early March. To use a favorite phrase of my American idol, Alan Greenspan, “irrational exuberance” in the sub-prime mortgage market allowed loans to be extended to some individuals who were not prepared for all of the joys of homeownership. The principle reason for the irrational exuberance was that investors on Wall Street had a great appetite for the product. They loved the high rates of return on their investment. So, everyone was happy, the investors, the lenders, the sellers, the real estate agents, the appraisers, the closing attorneys, the insurance agents, Home Depot and most of all, the borrowers.

You know there’s a black cloud to this silver lining. Unfortunately for the borrowers involved, many of these sub-prime loans were made on an adjustable rate basis. Frequently the arrangement was two years at a reasonable fixed rate of interest and then the remaining 28 years on an adjustable rate basis. A 2/28 loan, sometimes with interest only. The thought was that over two years, the borrower could improve their credit and refinance the home on a standard or “prime” mortgage. But, being human nature is what it is, they didn’t improve their credit and they didn’t refinance into a better loan. Then, they are surprised when their payments skyrocket after the two year period. They can’t pay the higher payments and wind up in foreclosure.

The house payments stop coming to the investors on Wall Street who say, “Huh? You mean I might not get paid on these risky loans I bought? Well, I won’t buy any more and if I can make the folks I bought them from buy them back from me, I’ll do that.” (They could do this under their purchase agreements which required the lender to repurchase certain individual defaulted loans within a particular time frame.) Many sub-prime lenders were simply not prepared to buy back the number of loans that were sent back to them. They sought the temporary protection of bankruptcy to figure out what to do. In addition, sub-prime lenders who had a lot of these closed loans on their loading docks ready to be shipped to investors on Wall Street, had no place to send them. With no cash coming in, they couldn’t fund new loans and pay their staff. They shut their doors.

Thus, when the investors on Wall Street stop buying a particular mortgage product (in this case sub-prime loans), mortgage lenders stop making them. No one manufactures a product for very long that people do not buy. It’s tough, but that’s capitalism. At that time, we wondered how this issue would impact other areas of mortgage lending. Would the bad sub-prime apple spoil the no-documentation apple or the interest-only apple? Well, the other shoe has apparently dropped. (Boy-howdy, I can’t resist an overused cliché, can I?)

Over the last 10 days or so, many alternative or limited documentation programs (referred to in the business as Alt A loans), and other programs perceived to be “risky” by Wall Street, have been curtailed by lenders. Alt-A programs include stated income (aka, ‘liar’ loans) and limited or no income documentation loans. Those lenders who are not outright pulling the plug (like that one?) on these programs are significantly raising the price of the product which acts to curtail their relative attractiveness and use. The simple reason for the curtailment in Alt A programs is the same as it was for sub-prime loans. Investors on Wall Street are leery of them. Lenders being the bright people they are, stop making loans they can’t sell. In addition to the curtailment in Alt A lending, non-conforming loans to investors, loans for second homes and loans in declining markets (not us!) are receiving close scrutiny. Prices are even increasing on jumbo loans (over $417,000) made to borrowers with good credit.

In essence, any loan that is not Fannie Mae, Freddie Mac or Ginnie Mae seems to be snake bit* at the moment. The present situation with non-conforming loans is difficult and sobering. It has a real day to day impact on what I can now offer customers. I have fewer tools in my tool box.* But, I suppose, this too shall pass. We will probably not get back to where we were in our ability to grant mortgage financing to anyone who can fog a mirror* any time soon, but we also probably shouldn’t. It is a disservice to approve a mortgage loan for someone who we know will not able to afford the payments and keep their home.

Fannie Mae (Federal National Mortgage Association or FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation or FHLMC) buy traditional conventional loans up to a current maximum mortgage amount of $417,000. These loans are also known as conforming conventional loans. Ginnie Mae (Government National Mortgage Association or GNMA) guarantees payments to investors of government loans, FHA and VA. Fannie, Freddie and Ginnie are GSE’s, government sponsored enterprises. They are the conduit for conforming loans. These programs are not in turmoil and it is business as usual in this area.

The bottom line: If you have average or better credit and can document your income, don’t worry about a thing. None of the standard conforming conventional or VA or FHA programs for which you would probably qualify have changed. 100% loan to value, conventional fixed rate and first time homebuyer loans are still available to you. The changes discussed here apply only to the non-conforming mortgage market, that is, everything that’s not Fannie, Freddie or Ginnie. For prompt and cheerful assistance with all your standard (or otherwise) mortgage needs, please call a LOCAL member of the Mortgage Bankers Association of Georgia. You’ll find a list of these professional mortgage lenders at www.mbag.org. Think global, but shop local! (*Sorry!)

David Griffin has been financing homes in Macon, Warner Robins and all of Middle Georgia since 1983. He is a two-time past president of the Mortgage Bankers Association of Middle Georgia. For an archive of past articles visit www.davidjgriffin.com.