How To Get Home

Countrywide Financial is the nation’s largest mortgage lender. As of Friday, Countrywide was telling brokers to stop offering the option of no-money down.

“Please get in any deals over 95 LTV (loan-to-value) today!” Countrywide said late on Friday in an urgent e-mail to brokers. “Countrywide BC will no longer be offering any 100 LTV products as of Monday, March 12.”

Let’s understand a few things to see why this is such an important development.

1. How did we get here? Down payment has always been one of the big obstacles to home ownership. Over the last seven years, lenders were looking to unlock any group of possible home buyers who were not able to buy. Allowing 100% financing would bring buyers into the market and allow lenders to make more loans. Early on, these types of loans required home buyer education, several months worth of reserves, and reasonable debt-to-income ratios.

2. What went wrong? With the evolution of credit scoring, lenders became more comfortable making more 100% loans. Lenders also became very aggressive in the Alt-A (stated income, no ratio, no-doc) and subprime markets. The last phase of the fast and loose lending was the creation of the interest-only and pay option ARM loans. With a strong housing market, very few of these no-down payment buyers got into any trouble as it was easy to refinance or sell the home when tough times hit. Then the music stopped. Many of these 100% Alt-A and subprime loans were made on adjustable rate mortgages. As these loans are now starting to adjust, the home owner’s are not able to make the higher payments, can not refinance the loan, and are having difficulty selling the homes in the slower market.

The significant surge in delinquencies and foreclosures is being tied to the aggressive lending products and the slowdown in the housing market. The fact that you could get a 100% stated income loan with a 620 credit score might not have been such a great idea in the first place, but that discussion will be for another post.

3. What does it mean? There is a change in lending practices under way as we speak. Every day, I get emails from underwriting and our mortgage banking department letting us know which products are no longer available. Bear Stearns was one of the more aggressive lenders in the Alt-A market. They have been raising required credit scores, lowering loan-to-values, and increasing the required reserves for many of their loan programs.

Dale Westhoff, Bear Stearns’ head of mortgage-backed research, estimates their will be a 30% contraction in the subprime market, which equals $180 billion less in fundings. He also figures a 25% reduction in the Alt-A market, which equals $100 billion less in closings. This $280 billion works out to be 1.1 million fewer home loans in 2007 by Westhoff’s calculations, no small number.

Better credit quality and down payments will help bring stability to the housing market. It is essential to work closely with your mortgage planner to determine which loan program is right for you. Be honest with yourself about how much home you can afford. The housing market is going through a healthy correction which is important for the long-term health of the industry. Maybe the market and home buyers got to complacent about risk and everyone is paying for that now. Either way, real estate will remain an excellent way to build wealth going forward.