Dean's Blog

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Within these posts, I hope to provide information about the industry and even post some white papers - situations that have occured and which we have resolved.

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You've been hearing in the news about subprime lenders exiting the business. (Of course, if you subscribe to my blog, you probably read about it here first.)

Today, we received notice that one of the nation's largest prime lenders is changing their guidelines on first and second mortgages, and in some cases, dropping their second mortgages all together. Here's a list of some of those changes:

• Minimum credit scores are being raised
• Dropping the ability to use second mortgages for 100% financing in some cases
• Dropping maximum borrowing capacity for all qualification types (full documentation, no-income verification, no-ratio, no-doc, etc.)
• And the list goes on

In short, investors are worried about the increased risk in the housing market with the increase in foreclosures and buy-backs (see my previous blog post).

It's going to get tighter before it gets better, and this will cause a further slowdown in the housing market. However, this is not an unusual cycle. Longterm, this will all work out.

With the increase in foreclosures and "buy-backs", more and more lenders are having trouble securing additional financing from Wall Street or other investors to make new loans. As a result, guidelines are changing resulting in more difficult lending requirements. It's going to get more difficult before it will get better. Unfortunately, those that will be hurt most will be those with damaged credit, low reserves, low downpayment or other traditional challenges.

Here's just a few headlines from today:

• RI Bank Shuts Down Wholesale Operations, Cites Low Street Bids
• Citadel Buys Bankrupt ResMae Mortgage
• New Century Under Criminal Probe - 'Running on Fumes' 
• Fremont Agrees to Cease-and-Desist, Will Exit B&C Lending
• Accredited Home Lenders Downgraded to 'Sell'

Now, more than ever, people need a truly independent representative to:

• Navigate the guidelines in an ever-changing marketplace
• Provide options among many different lenders and programs
• Guide them to the product and program that makes the most sense for them

At Security First Financial Services, we are independent mortgage brokers that works for the client.

As you may know, there has been a lot of turmoil in the mortgage industry in the last few months.

Recently, there has been a large increase in the number of foreclosures, and some investors are even requiring their lenders to "buyback" other loans. Consequently, there has been quite a few investors who have stopped providing additional funds to the lender community.

You see, lenders make money by lending money to new borrowers and selling the note to their investors. If they cannot get new money to lend, they cannot sell mortgages, and they are forced out of business. Since December 2006, there have been at least 6 national lenders that have closed their doors for the inability to obtain a new source of funds.

Now, this shift is starting to impact the 2nd mortgage market. In the last 2 weeks, we've seen many lenders tighten their requirements on 2nd mortgages or stop offering them all-together - mainly for the same reasons stated above.

Fortunately, there are still ways to put together loan packages without a 2nd mortgage. More commonly, we can use mortgage insurance and avoid the 2nd mortgage. And, with mortgage insurance being eligible for a tax deduction (at least for 2007), it has made that option much more feasible.

We were discussing this in our office the other day, and here's our prediction: While 2006 may have seen roughly an 80-20 split between the choice of 2nd mortgages vs. mortgage insurance, we believe that 2007 will end up flipping that number around where the 80-20 split will be in favor of mortgage insurance.

In and of itself, this change should not impact the housing market or the Realtor community, but it will require increased education among the new buyers. That's why buyers must seek out lenders who are willing to take the time to explain all of the options available to them, including the pros and cons of those options, and help the borrower make an informed decision.