Q: What forces have brought mortgage refinancing back to the forefront?
A: Mainly it's that interest rates keep dropping. With the Fed's discount rate to banks at zero, banks are getting money for pretty darn cheap. When the stock market tanks, you will see investors park their money in mortgage-backed securities (sold by Fannie Mae and Freddie Mac), and that helps drive rates down, as well. The credit has been available all along. There has been a shift in what Fannie Mae and Freddie Mac want documented and how. Now you have to prove everything.
Often when there's a weak stock market, rates will be lower, but they don't always flow together. The biggest hindrance for people wanting to take advantage of lower rates has been home values. We are seeing home values stabilize and even come up a little, depending on where they are in the valley.
Q: What element of the refinance process has gotten toughest?
A: In some respects, it's returned to normal, where lenders want to see pay stubs, previous W-2s or tax returns. They want to see bank statements so they can see where funds are coming from. If it's gifted (money), they want to see the documentation of who it's from and where those funds came from. They want the full picture to present to the underwriter, whereas before they used to connect the dots A plus B plus C equals the next step. Anymore, you have to have the full docs, or HUD (Housing and Urban Development) won't buy the loan from the lender.
Q: How has the recession challenged the mortgage business?
A: It's tougher now. There are fewer lenders as banks have dropped off and lenders faded away. We used to have 14,000-plus loan originators, and now we're down to about 4,000. They've either gone to the unemployment lines or jumped into helping people salvage their home stuff, but I don't know if that's been promising, either.
Q: What are people looking for when they go mortgage shopping?
A: Most are looking for a 30-year fixed rate. A lot of people were scared off from the adjustable-rate mortgages (ARM). There are still a lot of homes with short-term loans. You can find ARMs lower than the 30-year rates in the mid- to low 4s and ARMS with five-year fixed rates that are adjustable after that in the mid-3s.
The exotic mortgages have been basically terminated because nobody in the secondary market will buy those now. There were a lot of loan guys rolled under the bus for using those, but it was a tool used by investors, and they were products offered by HUD, Fannie or Freddie. There were a lot of those loans where you could do a negative amortization loan. It worked if the property value was going up. But people could still keep up and make regular payments, as long as it was interest only. I've still got a couple of clients whom I can't get out of those loans because the rates are so stinking low.
Q: What are the motivating factors to leave ARMs?
A: People are scared of the unknown, so they want something a little more solid. A lot of people in ARMs are trying to get into something more stable because a lot of them have the five-year portion coming due within the next year. They will recast the remainder of the loan into a 25-year note. It's going to adjust each year, and the interest rate will go down. But even though the rates are down, they are going to pay more.
Q: What are the critical qualifying numbers?
A: It takes 32 percent of the buyer's monthly income when we look at the front-end house payment. On the back end, it's 45 to 46 percent when you include all of your other debts, including car payments, credit cards or whatever. So people are looking more realistically at what they should be buying. We're still seeing credit scores all over the board. It used to be that 680 was a good score; now it's kind of the minimum. You can still get a loan at 620 if you go FHA (Federal Housing Administration) or something like that. It used to be 680 was the average score we looked for; now we want to see over 700. We will still do the other loans, but usually it's at a cost.
Reach Mail Tribune business editor Greg Stiles at 541-776-4463 or e-mail firstname.lastname@example.org.