Specialized Mortgages get squeezed by Credit Crunch
Credit crunch expands to cash-out refinancing, investment properties and vacation homes
The latest to feel the pinch:
* Cash-out refinancings.
* Loans with less than full documentation of borrower income, credit and assets.
* Mortgages for certain second-home purchases.
* Investment loan applications in which the buyer already owns at least three other rental properties.
* Mortgages to borrowers with nontraditional credit.
* Short-term construction loans that convert to permanent mortgages.
* Adjustable-rate mortgages in which the first adjustment occurs within 60 months after closing.
In a move scheduled to take effect for all loans delivered after Aug. 8, Freddie Mac will restrict financing to second-home and investment purchasers who already have “individual or joint ownership” interests in multiple properties. In the case of second-home buyers, they will be ineligible for new mortgages through Freddie if they have ownership interests in more than four properties securing debt, including the one they propose to finance.
Similarly, loans for rental houses, rental condos and other investment properties will be ineligible if the borrower has ownership stakes in four units. Previously, Freddie allowed investors to own up to 10 rental properties carrying mortgages.
Freddie Mac also announced new cutbacks on refinancings in which the property had secured a “cash-out” within the previous six months. The company defines a cash-out as any refinancing in which the replacement loan balance exceeds the previous balance by 5% or more. Recently, according to the company’s quarterly surveys, more than 80% of refinancings involved equity-depleting cash-outs.
The rule changes, Freddie Mac said, are designed to “reflect the risk of these transactions” in the wake of post-boom property devaluations and higher rates of foreclosure.
Meanwhile, private mortgage insurers — who provide loss coverage for lenders and investors on loans with down payments of less than 20% — have begun rollbacks on a variety of products, especially in areas they define as distressed or declining.
Genworth Financial, one of the largest insurers, recently told lenders that after Monday, it no longer will consider applications for second-home purchases anywhere in Florida. The new policy is irrespective of borrowers’ credit scores, assets or other characteristics.
Also effective that date, in all “declining/distressed” markets, Genworth will not touch cash-out refinancings, investment properties of any type, nontraditional credit applications, construction/permanent loans or adjustable-rate mortgages with initial adjustments within the first five years.
In its advisory, Genworth said the restrictions are intended to promote “prudent underwriting standards” in light of higher risks prevailing “nationally and at localized levels.”
PMI Group, another high-volume insurer, banned cash-out refinancings, limited documentation loans and all mortgages secured by investment properties in “distressed” markets. In nondistressed areas, cash-out refinancings on second homes and rental houses no longer are eligible for coverage, nor are interest-only loans on investment real estate and all mortgages on properties containing three to four units.
PMI also boosted minimum credit score requirements for “jumbo” loans nationwide to a FICO of 700 and now will require at least 10% down payments. The company also ruled out “stated income/stated asset” mortgages on duplex purchases, in which one unit is occupied by the owners and the other is rented out.
MGIC, the largest private mortgage insurer, recently eliminated coverage of all “option ARM” loans that have either scheduled or potential negative amortization features that increase borrowers’ principal debt rather than reduce it monthly. MGIC’s new ban is nationwide.
The company also no longer will insure cash-out refinancings using limited documentation, temporary rate buy-downs on investment real estate and nontraditional credit applications to buy second homes.
Why the continuing rollbacks, and how long could they continue? Lenders and insurers are carefully studying the sources of their greatest losses from mortgage vintages between 2003 and 2007. In the areas where they see inordinate risk, they are reacting by eradicating that risk.
Some of those high-loss loan products — mass-marketed option ARMs with minimal down payments and “stated” incomes, for instance — probably never will be seen again. Others are likely to return only with tougher underwriting standards and higher fees tied to credit and geographic risks.
In the meantime, consumers have little choice: Get used to it. It’s not going away any time soon.
May 09 2008 12:50 pm | Lending Info
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May 9th, 2008 at 1:03 pm
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May 9th, 2008 at 2:09 pm
[…] Original post here […]
May 9th, 2008 at 2:10 pm
[…] Rick Gomez wrote an interesting post today onHere’s a quick excerptInvestment loan applications in which the buyer already owns at least three other rental properties. * Mortgages to borrowers with nontraditional credit. * Short-term construction loans that convert to permanent mortgages. … […]
May 9th, 2008 at 2:51 pm
[…] admin wrote an interesting post today on Specialized Mortgages get squeezed by Credit CrunchHere’s a quick excerptIn nondistressed areas, cash-out refinancings on second homes and rental houses no longer are eligible for coverage, nor are interest-only loans on investment real estate and all mortgages on properties containing three to four units. … […]