Lending standards return to normal

The United States is returning to the "sane" underwriting practices of yesteryear, so money has necessarily become tighter.

But if you have a good credit score and money saved, the good news is you can get an incredibly low interest rate on a home purchase or refinance right now, according to Mike Sante, Chicago managing editor of interest.com, a subsidiary of bankrate.com, the Internet site dedicated to financial analysis and information.

"We are experiencing truly record low mortgage rates right now," Sante said. "The best mortgage out there is about 5.125 percent with no points and less than $1,000 in origination fees."

"We tell people that if they can get a 5 percent mortgage they should be doing handsprings down the street. That is a mortgage that you want to keep forever and not refinance," he said. "Don't be greedy and sit back and hope for a 4 percent mortgage. We don't see that happening."

Sante added that you can actually get a 4.5 percent mortgage right now, but you have to be willing to pay lots of points to get it and the cost is not worth it, in his opinion.

"Don't let the possibility that rates will go a little lower put the kibosh on a great mortgage deal right now," Sante said.

What is the current state of the mortgage market?

The subprime mortgage crisis is over, Sante said. Most of those loans have worked their way through the system. Many people have defaulted and gone into foreclosure. Some have managed to refinance. Others have somehow learned to live with them.

"But the first wave of unaffordable mortgages that kicked off this whole crisis is pretty much gone."

Now mortgage experts are seeing people in trouble who have lost their jobs. They are driving a second wave of defaults. And yet another wave remains to be felt. Those are the $750 billion worth of option adjustable rate mortgages, Sante said.

With those loans, for the first five years of the loan, homeowners have the option each month of picking among four different payments. The lowest payment does not even cover the accruing interest, Sante said. So those who have been paying the minimum have been falling further in debt with every check they write.

In addition, many did not understand or bother to read the provisions which impose an overall debt cap on their loan. Many of them will hit that cap about 3½ years into the loan and their payments will increase by 75 or 100 percent. Most have no equity in their homes and little or no money saved, so they will have no way to refinance and they will default. Those loans will cause a third wave of foreclosures, Sante predicted. But their number is less than half that of the subprime mortgages.

"If those option ARMs were the only remaining problem out there, we would expect to see things slowly correcting. But the fact that we also have a spike in foreclosures caused by job losses is keeping the housing market depressed.

"Last year people were worried about buying houses and having the value fall. Now people are worried about that, and also about possibly losing their jobs. So they are hunkered down. The general consensus now is that home prices will continue to fall in 2009 and there will be no significant rise in home sales until 2010."

During the height of the market, the national adjusted annualized selling rate of condominiums, single family homes, townhouses - everything - was close to 7 million. Now, he said, it is 4.5 million.

As for prices, they have fallen an average of 20 percent nationally, but between 15 and 18 percent in the Chicago area.

"I expect to start seeing a recovery in 2010 but first we have to get through a tough year."

How will President Obama's mortgage and stimulus packages change the overall mortgage situation?

"That is the wild card. No one knows how well that will work. I have heard no thoughtful, credible statements yet from any economists on the subject."

Economists last year estimated that the U.S. would be bumping up against 10 percent unemployment in 2009, Sante said. Now some think that unemployment will exceed 10 percent, which has already happened in California.

"And foreclosure rates closely track unemployment rates - the more unemployment, the more foreclosures."

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

"If you can truly afford a house, you can get a mortgage. It is not true that you can't get financing."

The people who are having trouble getting mortgages are those who have a less than desirable credit score (lower than 720). Those people need to try for an FHA loan.

Another group that is experiencing difficulty, Sante said, are self-employed people who don't get a traditional paycheck. The no documentation loans were created for them, but since they were so badly abused, they have disappeared.

Finally, those seeking jumbo loans are also having trouble. They make up 10 percent of the market and the government is not involved in those loans. So you have to approach a major bank and they are demanding lots of equity or a big down payment.

"These (current) requirements were standard for 30 years before the insanity hit. These were the rules that kept us from getting in trouble and for the great majority of buyers, what they are now requiring is pretty sound.

"People need to realize that houses are expensive. You have to have some cash to get one."

How can you make yourself look like a better risk to a potential lender?

Boost your credit score by paying your bills on time, all the time, Sante suggested.

Postpone purchases of that new car or furniture because you don't want to have those expenditures on your record when you are getting ready to buy a house.

Pay down your credit card debt and build up your cash reserves so you can make a good down payment and have sufficient cash for several months of mortgage payments.

Don't apply for any new credit cards and don't ever go over the 50 percent level on your credit limit on the cards you have. Even if you pay them off every month, that hurts your credit score, Sante said.

Finally, pull a copy of your credit report - once - and look it over carefully for mistakes. Correct any that you find.

What do you see in the future?

"I see nothing to indicate mortgage rates will spike any higher in the near future and I hear lots of talk about 4- and even 3-percent mortgages. But I find that unlikely."