After the Chaos – What Types of Mortgages Remain
The subprime mortgage meltdown had a chaotic effect on the US economy and world financial markets in 2008. After the subprime banks closed en masse, the Alt-A lenders were shut down, eliminating all aggressive financing options in the US mortgage market. This has led to a major credit crunch and has had a disastrous effect on the US mortgage industry and overall economy.
The previous dozen years of mortgage options and financial bliss have become a memory, with every liberal mortgage program no longer available. The remaining mortgage products are quite unlike the guidelines from the past few years. Now…they require full documentation of income, strong credit, and actually proving you have a job! It’s no stretch to say that common-sense has returned to the mortgage world.
Pre-Subprime Meltdown:
Before the mortgage meltodown, 100% loan financing was available for almost every borrower. If you could prove you were a citizen, you could get 100% financing regardless of past credit. Today in late 2008, there are no longer any options for 100% financing available outside of VA and USDA loans. If anyone tells you differently, they are leading you astray. These do not exist at this time. Investors have decided that they will not buy any mortgage loans where the borrower does not have a sizable down payment or existing equity in their loan.
The Alternative A credit market, also known as Alt-A loans, which used to offer very appealing niche loan financing products catering to borrowers with credit scores from 660 and up are also gone. These lenders offered loan programs to borrowers with scores down to 620. Aggressive programs, such as 100% no doc financing, were typically not available to borrowers below a 660 middle score. Today, even these seemingly viable products made to very strong borrowers have dried up. They were a victim of the global mortgage chaos that devoured the sub-prime banks and saw even the big 3 Automobile companies suffering and on the verge of collapse. Alt-A lenders had very liberal DTI ratios, reduced and even no income documentations, and the ability to turn any loan into an interest-only mortgage!
Some examples of leading Alt-A lenders were Aurora, GreenPoint, SunTrust, First Horizon, and IndyMac. Besides these, there were literally hundreds and hundreds of lenders that emerged to fill certain niches. Many of these lenders are out of business, while others have just eliminated the Alt-A product line.
Post Subprime Meltdown:
As 2008 ends, hundred and hundreds of banks are closed operations. The aggressive loan options that arose over the past decade are now gone, and more than likely will never return. The credit crunch is making it even tougher for average customers seeking home loans to get a loan. FHA is king again, as the only program that lenders are comfortably loaning money towards is the hallmark of the mortgage business — the FHA loan from the Department of Housing and Urban Development. Credit score requirements are now in the low 700’s, where before a 680 was sufficient. Cash-out refinance mortgages on single family homes are very hard to get, and for many people, impossible. HELOC’s are being reduced for millions of customers. Additionally, investor loan financing is extremely hard to obtain, no matter how strong the client.
As 2008 comes to an end, home loans are still very hard to obtain. Fannie Mae and Freddie Mac have imposed stricter guidelines effective December 1st, 2008. These guidelines will further restrict the ability to obtain mortgages for many poeple. There are extremely tight restrictions now placed on home loan customers — such as limiting the number of properties financed, the addition of new, more stringent credit requirements, and much to the detriment of borrowers with past credit blemishes, there are new rules and restrictions for borrowers who have had a past bankruptcy and/or foreclosure.
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