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VOL. 123 | NO. 180 | Monday, September 15, 2008

Different Times Call for Changes In Mortgage Biz

By Eric Smith

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“Over the past few years everything got so loose. Everybody feels like, to some degree, this is a major adjustment, when the reality is we’re going back to where things were. I do feel like the pendulum went a little bit too far, and we need to see it come back just a little bit.”
– Carol McConkey
Senior vice president, Paragon National Bank

Officially, two weeks remain before seller-assisted down payment programs disappear, though lenders already have stopped submitting them to the Federal Housing Administration because the paperwork on those programs takes so long they can no longer meet the Oct. 1 deadline.

Meanwhile, U.S. Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, is hoping to revive the down-payment assistance (DPA) programs that were eliminated by this summer’s Housing and Economic Recovery Act of 2008.

Until (and if) that happens, mortgage bankers and brokers are navigating the lending landscape with a new outlook that prohibits sellers – often homebuilders – from providing down payments for homebuyers.

“Today we’re playing under new rules,” said Jo Garner, loan officer at First Tennessee Home Loans. “But there are still loans out there. You wouldn’t believe where I’m finding money these people have. It goes back to the old adage that ‘Necessity is the mother of invention.’”

Looking for gold

If any industry needs reinvention these days, it’s the mortgage business. Faced with declining consumer confidence, tightened credit and sagging home sales, the industry is reeling. One way to cope with changing times is to make the old new again.

A few years ago Garner wrote an article called “Show Me the Money: Treasure Hunting for Closing Funds,” which detailed different ways borrowers could find down payments for a home.

Its subject – and especially its title – might be more relevant now than when she wrote it because it examines alternate, and still legitimate, ways for uncovering down payment money.

“Now that the seller-funded down-payment assistance program is going away, people are looking for gold,” Garner said.

One place is in the U.S. Department of Agriculture’s rural development loan program, which is one of the only 100-percent mortgages remaining. Though it’s obviously geared toward homebuyers who live in rural areas, plenty of Mid-South communities are eligible, including all of Fayette and Tipton counties and parts of Shelby and DeSoto counties.

Gold also comes in the form of cash value in a life insurance policy or even a family gift. Other avenues include a loan from the Tennessee Housing Development Agency or some other public organization or private nonprofit group that isn’t reimbursed by the seller, although those typically come with a host of restrictions.

While none of the ideas are new, there is clearly renewed interest in them now that the pendulum has swung so far the other direction, noted Lisa Reid, executive vice president and mortgage division manager at Magna Bank.

“We’ve kind of gotten used to them, but maybe more emphasis will be put on those programs,” she said.

Finding prudence

So did lenders see a bump in mortgage activity in the past month in response to the coming deadline? Did borrowers scurry to get in before the deadline? Most lenders said yes, although whether that results in a huge upswing of mortgages remains to be seen.

“It seems like there’s been a rush here to make sure some folks got in before that went away,” said Carol McConkey, senior vice president for Paragon National Bank.

DPA programs disappeared because of the problems they caused. Though they put more people into homes, participants were more likely to default, which has led to the recent rash of foreclosures. If the programs come back, they likely will be revamped with increased credit requirements.

“It’s a double-edged sword because there’s no doubt we’ve seen a much higher level of foreclosure and early-payment defaults with those type loans,” Reid said. “But what they’re looking to say is, ‘Let’s do this with qualified buyers who have good credit scores and let them have the benefit of it.’ Before, all borrowers were created equal. Those less-qualified buyers were the ones we were seeing default.”

Keeping DPA programs around could be a salve for both the homebuilding and the mortgage industries, and it might be a shot in the arm for the economy. Seller-funded down-payment assistance, in fact, might be the only way to reduce housing inventory.

But it must be brought back in the right way, lenders noted.

“With anything, it’s got to be done with prudent lending standards,” McConkey said. “The question becomes: ‘Is it good to have the borrower put something into the deal, or are they that much more likely to walk away if they don’t have any skin in the deal?’”

The industry doesn’t want history to repeat itself by loosening guidelines that created the current mess.

“Over the past few years everything got so loose,” McConkey said. “Everybody feels like, to some degree, this is a major adjustment, when the reality is we’re going back to where things were. I do feel like the pendulum went a little bit too far, and we need to see it come back just a little bit.”

PROPERTY SALES 66 66 6,612
MORTGAGES 78 78 4,207
BUILDING PERMITS 158 158 16,073
BANKRUPTCIES 45 45 3,441