Lending guidelines eased in the push for homeownership

The culprit in the recent subprime mortgage crisis may be the computer program Fannie Mae and Freddie Mac instituted in the late 1990s to automate their underwriting approvals, and the people behind it.

According to Dylan Kramer, president and CEO of America's Mortgage Choice, a medium-sized mortgage broker based in Oakbrook Terrace, you had to have a minimum credit score of 620 in 1999 to get the exact same loan that you only needed a minimum credit score of 580 to get by early 2007.

"Mortgage brokers stopped calculating the numbers by hand, instead going to a computer program and eventually to the Internet," he explained. "And Fannie Mae and Freddie Mac just kept introducing more and more leniency into the model."

"The Bush administration wanted to expand homeownership and we did see a rise of 5 to 7 percent in homeownership, but I guess it got to an unhealthy level," Kramer said.

"There are legitimate reasons (why) some people should be renters, not owners, and when it came to lending, all prudence went out the window," Kramer continued.

Add to that the fact that Wall Street got greedy for the fees involved in packaging these loans and selling them and you get us to the problems we have today.

"The people on Wall Street thought that if they took 100,000 mortgages from all over the country and all different situations and packaged them together and sold them, that they would be protected because they were diversifying enough. Obviously, they were wrong," he said.

What is the state of the mortgage business now?

"There is a lot of uncertainty out there because no one knows how all of this is going to end.

"Buyers are getting crossed messages. Lending guidelines are tightening, but people are saying that now is a good time to buy real estate, so people don't know what to do."

Is it difficult for a qualified buyer to get a mortgage today?

"Even for folks who have a good credit score of 720, 20 percent for a down payment and documentable income, it is hard to get through a loan committee right now.

"It used to be that all (lenders) thought about was how they could get a loan approved so that they could earn fees from it. Now they are looking to see if the loan can be repaid, so they are going through everything, including appraisals, with a fine tooth comb."

Loan committees are becoming more deliberate, and that is good, Kramer said.

What do you suggest that someone attempting to get a mortgage do to make themselves more attractive to a lender?

"It is no longer enough to get prequalified before you go shopping for a house. Now you need to get preapproved. Banks will do that without a particular property identified. You need to get a letter of commitment from your lender."

But before you even approach a lender, Kramer suggests that you make sure your credit report is accurate and make sure that any balances on credit cards are no more than 35 percent of the available credit. So, for instance, if your credit line on your card is $3,000, don't have an ongoing balance of any more than $1,000 on that card.

What changes have been made in mortgage lending procedures to prevent future difficulties like the current rash of foreclosures?

"The elimination of the acronym loans, like SISA (Stated Income Stated Assets) and NINA (No Income No Assets), that were widely available between 2002 and 2007 is a good thing. And I am very glad that they are finally having appropriate due diligence on appraisals."

The fairly recent requirement that mortgage brokers be licensed in the state of Illinois is also an improvement, Kramer said.

"Lots of people jumped into the mortgage business because it was so easy to make money, and even though the licensing requirement has been around for several years now, it took a few years for the state to track down all the unlicensed brokers and put them out of business."

What do you see in the future of the mortgage industry?

"Empty-nesters will still sell their homes and downsize. Young people will still get married, have a family and buy houses. None of that is going to change. But the mortgage market will look a lot more cautious for awhile. I don't expect any risky lending for years to come.

"Five years down the road, this will all be settled but I sense that there will be a lot of pain between here and there. We just have to take our medicine now and go through the tough times," he stated.

Kramer is also not a fan of the proposed Wall Street bailout of investment banks that lost money buy and selling these risky mortgages.

"I would like to see the details, but I think that the government bailout of the banks is a bad idea. Any time you bail people out, they are likely to repeat their bad behavior. Maybe we will just end up with fewer banks, and that could be good."