Cost increases on 'jumbo' loans for more expensive houses

The historic bailout that Congress approved last week may be odious, but it is also necessary, according to Holdon Lewis, North Palm Beach, Fla.-based senior reporter for Bankrate.com.

"I am angry about it," Lewis admitted. "The fact that we are having to pay all this money to bail out people who made really stupid decisions for a lot of years is awful.

"But I am afraid that it is necessary. Without such a move the banks would be afraid to loan to each other and businesses would have trouble getting loans to even meet their payrolls," he explained.

"I understand people wanting to see those who caused this punished," Lewis continued. "But sometimes when you try to punish other people, you end up hurting yourself and I think that is what would have ended up happening in this case."

What is the state of the mortgage business at present?

"It is like two businesses right now. There is the conforming mortgage business with loans less than $417,000. If you want a loan under that limit, you can get it fairly easily if you have ten percent down, a credit score of 720 or more and can prove your income and assets. You can even get a good rate of about 6.5 percent.

"But if you want a jumbo loan of higher than that limit, you are going to pay a full percentage point higher interest, sometimes even more. Some of the big banks actually seem to be pricing their jumbo loans really high to discourage people from taking them out so someone wanting a jumbo loan should really go to a mortgage broker who can shop rates from different sources."

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

First of all, according to Lewis, you should shop for a mortgage before you start looking at houses so that you can "get a good sense of what you can afford."

Next, he said, you need to take the time to gather your paperwork and get it in order.

"People seem to be really messed up with their filing these days. You need to be able to show utility bills for at least six months. You need to be able to show your last three months of bank statements. You need to have several months worth of pay stubs.

"You really need to be able to document things for the lenders now and lots of people aren't keeping good records."

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

"I think that the industry has done a pretty good job of tightening the lending requirements. Anyone getting a mortgage now is getting an airtight mortgage.

"Sure, there will still be some foreclosures because bad things happen to people, like job losses and illness. But no one will lose their house through pure foolishness now."

What mistakes did people make to cause this situation in the economy?

According to Lewis, between 2002 and 2007 "people bought houses they couldn't afford and others refinanced, taking equity out of their houses in order to buy fancy cars and take fancy vacations."

When housing prices began to fall, many of these people got "upside down" on their loans, which means that they ended up owing more on their mortgages than the houses were now worth.

"Many took out adjustable rate mortgages with the idea that they would refinance before the payments went up. But now that housing prices have dropped as much as 30 percent in some places, the 20 percent equity they had in their house has been wiped out and they can't refinance because they don't have the cash to pay the difference between what they owe and what their house is worth."

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

"In a few years I think that in most areas of the country, mortgage loans will be plentiful again. But they won't be writing any of those dumb 'no income/no asset' loans anymore and lenders will be scrutinizing the deals very carefully from now on."

But the recovery will differ from place to place.

"When things get back to normal will depend on the recovery of the housing market and that will differ geographically. For instance, I think that places like Texas, where only the most affluent areas boomed, the market will recover fairly soon. Except in the very affluent mini-markets, the troubles there have not been deep and they won't last long.

"But in places like Florida and California, I anticipate that prices will continue to drop for several more years."

These places, along with Las Vegas and Phoenix, saw home values on paper increase by five to six percent per quarter during the boom years.

"That couldn't continue. People should have seen what was coming. So in places like that, I think that there will be pretty steep down payment requirements for a long time to come."

Condominiums, in particular, will be hard to sell because, according to Lewis, mortgage insurance will no longer underwrite condominiums, so you have to put at least 20 percent down or there is no deal.

"In Dade County (Miami) we had people coming in and buying condominiums as investments. They put as little money down as they possibly could because they were hoping to sell them right away. Now we have lots of empty condominiums and all of the rents are incredibly low because owners are competing with their neighbors for prospective renters. And because the rents are so low, the owners can't even cover their mortgage payments."