Are You Prepared For The Mortgage Crisis?

Posted Aug 3, 2009 @ 3:29 pm, Viewed by 255 Visitors, Read 270 Times.

The mortgage crisis is having it’s effect on tenants, investors, and home buyers. Lenders are getting stricter every month and are changing their qualifying guidelines and program offerings. Investors are funding fewer risky mortgages, and many first time buyers can no longer qualify for a mortgage. Even ‘A’ credit borrowers are feeling the squeeze.

Mortgage companies can either hold the mortgage in their own portfolio or sell in the secondary market. Most loans are sold in the secondary market and are called conforming mortgages. Primary mortgages include commercial banks, savings and loans, credit unions, and mortgage companies who service their own portfolio of loans. Fannie Mae and Freddie Mac purchase mortgages from lenders for cash and either hold the mortgages in their portfolio or issue Mortgage-Backed-Securities in exchange for pools of mortgages from lenders. This gives lenders much more flexibility, because they are able to replenish their funds and make more loans when they sell the mortgages in the secondary market. In order for lenders to sell their mortgages in the secondary market, they must meet the guidelines of Fannie Mae and Freddie Mac including maximum loan amounts, number of mortgages allowed by a borrower, debt ratio limits, etc.
Fannie Mae and Freddie Mac require a borrower’s total debt ratios to be below 50% of their gross income. If an investor borrower has a gross income of $8000, total debt including the rental property mortgage cannot exceed $4,000. If the rental property mortgage is $1,000, the borrower can have no more than $3,000 in total other debt including credit card payments, car loans, student loans, and current mortgage(s). As long as the borrower had a fico score above 680, many lenders would fund non-owner occupied mortgages simply by stating their income. No income documentation was required to qualify for the mortgage. Many mortgage companies had large pools of investors who were willing to fund these loans. Once the subprime market crashed, the demand for non-conforming loans plunged. Hence, hundreds of lenders went out of business within a few months. These types of loans are no longer available in today’s market.
At best, investors were able to cover their debt service only by putting at least 20%-30% down on the property. Most investors putting less than 20% down have monthly negative cash flow exceeding $200 per month. To get around this, many investors obtained interest only or short term fixed rates that turn into adjustable rate mortgages after only a few years. Many investors assumed high appreciation rates and ignored the negative cash flow. We refer to this strategy as gambling.
Many investors purchased rental property with little or no down payment. Some investors put as little as 5% down, and some even obtained 100% financing. Many pulled money out of their primary homes in a line of credit mortgage and could only qualify for a stated income mortgages. These investors are in trouble today. Most are not able to refinance their current mortgages to fixed rates if they have an interest only or ARM mortgage product. The home may not appraise high enough to meet the 20% equity now required by lenders to refinance to a fixed rate. Most lenders are requiring at least 20% down for purchases of rental property, and few if any are offering stated income products. Investors wanting to put less than 20% down have few options.
This mortgage crisis is also affecting professional investors. Fannie Mae allows borrowers to have up to 10 mortgages including their primary residence. If an investor owns more than 10 properties, he most likely will not be able to purchase another rental property or refinance any existing mortgage(s). Few investors can qualify for a full doc loan and cover the debt ratios. For example, an investor who owns 12 properties with a $1,000 mortgage must have gross monthly income of at least $24,000. Lenders only allow investors to use 75% of rental income. This further increases the debt ratios for full doc borrowers.
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