What's the State of the Union on Mortgage Matters Right Now?

Tim Sickinger   

Unraveling the mortgage mess with Tim Sickinger: What’s in store for home buyers?

Transcript

John: Welcome back to CreditFYI. We're talking, once again, with Tim Sickinger, Principal of Fairfield County, CT-based Ladd Financial. And today, we'll be talking about what the troubled economy might mean for home buyers moving forward.

Welcome back, Tim. Thanks for talking with us again today.

Tim: Oh, it's good to be here, John.

John: Well, it's always good to have you. Let's get right into a few questions. Let's talk about what might be in store for home buyers, now nearly a month or so after the federal bailout, and really some six weeks since the collapse of once-venerable investment bank, Lehman Brothers. Tim, despite all that's happened, average mortgage interest rates haven't really changed all that much since the beginning of the year. Is that a surprise to you?

Tim: I guess it is not a surprise right now, John, considering the state of the credit crunch. I think, in general, there are not buyers for mortgage-backed securities, including those securities put together by Fannie Mae and Freddie Mac. Actually, I should say there are not buyers, but in order to attract buyers, we have to have higher interest rates on those mortgage bonds, and that's kind of where we are right now. Even though Treasury rates have, in fact, fallen, really mortgage rates have not. I'm hoping that as the crisis loosens up a little bit and more lenders are making more loans to consumers, that we'll begin to see marginal improvements in interest rates — not huge improvements, but marginal improvements.

John: Tim, speaking of government loans, other than the fact that a large percentage of the home loans being made today are, in fact, federally sponsored, has anything else changed for home buyers? For example, is it tougher to qualify for a loan now? Especially if you're a first-time buyer?

Tim: Assuming you're going directly to the FHA (Federal Housing Authority), the answer's probably "no." It is not any tougher to qualify for a mortgage. The "no qualifier" loans no longer exist, and they, frankly, have not existed for a good six to eight months. ("No qualifier" meaning no income verification or bad credit loans.) You need to have a job right now; you need to have saved some money; and you need to have a — not necessarily perfect credit rating — but you need to have a credit rating. And the property that you're going to lend upon needs to be appraised, and it needs to come out on value. That said, I mean it's more difficult to get loans in the sense that property values have definitely declined. So lenders are really scrutinizing those appraisals and making sure that they are lending against a property that's potentially worth the money. In terms of credit scores, there are still lenders — especially with the FHA — that'll look at a credit score as low as 580, with a very low down payment, a 5 percent down payment. You better have other good answers as to why your credit score is so low, and you should also have a good job and probably some good savings history, if you're going to get that kind of a loan. But it's about loans that make sense — something that used to be the way banks did business: As they did mortgages, they did loans that made sense. I think we're kind of back to that; if you look at the guidelines today, they look very similar — to me — as the guidelines were 20 years ago.

John: So conversely — especially in terms of credit scores, Tim — if you do have a higher credit score, if you've been able to make it through this hailstorm really — this credit crunch — with a good credit score intact, will you be rewarded for that?

Tim: In fact, with most lenders you are rewarded if your credit score is over 720. Those rewards are — it's hard to quantify them. But you can assume that you're going to get a rate which is about an eighth to a quarter-percent more if you're in the highest credit score bracket, and you have a relatively low loan to value: Meaning that your mortgage is maybe 70 percent or less than the value of your home. There are higher penalties now, I should say; rates are a little bit higher for lower credit scores and higher loan to values. They're pricing the risk of the transaction into the mortgage rate. I actually think that's probably a wise way to go, because obviously, from a lender's perspective, the loan is riskier if you're putting down less than five percent, or you're putting down ten percent. If you have a credit score that's lower than, say, 650, that's a riskier loan too. So a lender should ask for a little higher interest rate on that, but again, that's my personal belief. I don't want to — I don't know if I've answered your question yet or not.

John: No, absolutely. I think that you have, and I understand what you mean. Just for our listeners in general terms, don't think that the crunch has allowed you to let the credit score slip — quite the contrary, from what you just mentioned. Tim, in terms of where the government is on all this — in terms of the FDIC being in cooperation with the Treasury Department and the fact that they've now launched this program to help those who are specifically facing foreclosure — do you think that's really going to help very much?

Tim: Well, I just want to be clear on that. That has not yet been launched yet. They're coming up with a plan, and as of yet, they have not defined what that plan will be. So I know we've been hearing a lot of lip service by the politicians, and you've been reading a lot of stuff about it in the papers, but make no mistake, there's no plan out there yet. I do anticipate that there will be one, but it's not in existence yet. Now will a plan be better for us? Bottom line is anything that actually can stem the fall of property values — the prices of homes — is very good for not only the real estate market, but the mortgage market. We need to sort of stop the downward spiral all around this country of prices. And by allowing some individuals who potentially wouldn't have gone into foreclosure, helping them to keep their homes, potentially lowering their loan amounts, lengthening their loans, or decreasing their interest rates, I think that's a wonderful thing for our economy and for the real estate market as a whole. But it has not been done yet. So keep your ears peeled; nothing's happened yet. Hopefully it'll happen soon.

John: All right, well, you heard it out there, listeners. There is not an exact plan in place, as far as government dollars helping out those who are in danger of foreclosure, but hopefully it will be soon. Tim, as always, we thank you for your expert input, and we look forward to your next visit.

Tim: Oh, I look forward to it, to. Thanks very much, John.

John: Thank you, Tim Sickinger.