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New rule for getting a mortgage today: Don't assume anything

In today's mortgage market, there's still money out there for those with good credit scores, significant down payments and decent income streams.
But even borrowers who think they're well positioned to be approved for a mortgage "can't assume anything," said Guy Cecala, of Inside Mortgage Finance. And they'd better be prepared to shop around to get the best rates

Coverage of home buying and selling, housing prices, mortgage information and home improvement

Cecala estimates that a third of the people who were able to get a loan in 2005 and 2006 no longer qualify for financing today. That takes into account the disappearance of subprime and Alt-A loans as well as the tightened requirements for getting prime mortgages, he said.
"Mortgage credit is as tight as we've seen it in a generation," said Cecala, publisher of the industry newsletter. "When does it get looser? When people feel that the housing market is stabilized, and that's really not going to happen until we start seeing an end to rising defaults and foreclosures, and housing prices have stabilized in markets throughout the country."
If he had to guess, it'll be another year before getting a mortgage becomes any easier.
In some cases, lenders are even looking beyond the numbers for proof not only that an applicant has a job with a steady income stream but is also likely to keep that job, said Bob Moulton, president of Americana Mortgage Group on Long Island, N.Y.
Case in point: One of his clients, an employee at Bear Stearns, was recently required to get a statement from the human resources department indicating continued probability of employment at the firm. The statement could not be obtained, and the mortgage wasn't approved, he said.
"They're trying to be a lot smarter than they were three, four or five years ago," he said.
And when looking at a borrower's income, lenders have become more skeptical of counting on bonuses to come through this year, said Steve Habetz, president of Threshold Mortgage in Westport, Conn.
A barrier to buying?
Borrowers are definitely getting the message that the rules these days for getting a mortgage have changed.
According to a recent survey by Move Inc., 28% of would-be buyers perceive the lack of funds for a down payment as a barrier to owning a home these days. Coming up with the cash was the second highest hurdle people saw to buying, while 31% said that high home prices constituted the biggest roadblock to buying in this market. Move is the operator of Realtor.com.
That said, people are seeing opportunities to buy -- especially in some of the areas hardest hit by home-price declines -- as searches in these areas have been increasing substantially at Realtor.com, said Errol Samuelson, president of Realtor.com.
A buyer's challenge, then, often is: "How do I figure out the financing?" he said.
Seventy-eight percent of prospective home buyers said that they're willing to make sacrifices to save and earn extra income for down payments -- and would make some compromises on where they decide to live -- in order to buy a home in this market, according to the Move survey.
But some at the National Association of Realtors think getting mortgage might not be as hard as consumers believe -- and might even be getting easier. A June survey of more than 2,000 NAR members hinted that buyers aren't finding it impossible to obtain financing.
When asked why their most recent prospective buyer postponed a home-buying decision, 6% said it was because of mortgage difficulties. On the other hand, 23% said the prospective buyer didn't buy because of waiting for prices to drop further.
Mortgage rates, in general, have drifted up from their low levels at the beginning of the year, which could take away one advantage people might have seen to making a home purchase in today's market, Habetz pointed out. Freddie Mac reported that the 30-year fixed-rate mortgage averaged 6.26% this week; Habetz said fixed-rates need to be closer to 5% in order to jump start home buying. See full story.
What to know
If you're shopping for a mortgage these days, here's what you need to know:
For the best rates on a conforming loan, people need a 20% down payment and a FICO of 750 or higher, Cecala said. Not surprisingly, very few people meet those requirements, he added. Risk-based pricing by Fannie Mae and Freddie Mac will cause those who don't meet those basic parameters to pay more for their mortgage. So even if you're able to get a mortgage with a 640 credit score, the loan terms will be more expensive, he said -- and if you have a low credit score you'll probably have to put more money down than someone who has better credit.
Borrowers who aren't able to put 20% down will likely have to purchase mortgage insurance, and to get that there's another set of requirements that must be met. Insurers are being "very cautious" with regard to what they will insure, Habetz said. Requirements differ at each mortgage-insurance firm, but if a home is in a market where prices are declining, borrowers may be asked to put down 10%.
Borrowers who are eligible for a loan backed by the Federal Housing Administration may be able to put down as little as 3%. That has become a more popular option for those with weak credit scores.
Most nonconforming jumbo loans today are being made by portfolio lenders, who keep the loans on their books, Cecala said. Consumers may do well by doing some legwork and comparing rates at local community banks, which have been "coming out of the woodwork" to offer competitive rates, he added.
"There's money to be had, you just have to jump through hoops to get it,

Foreclosures to rise whoever wins White House

WASHINGTON - Home foreclosures will keep rising next year no matter who is elected president in November.

Even the optimism that surrounds a new president taking office cannot resurrect home values overnight, and presidents have no direct ability to reduce rising mortgage rates. Nevertheless, Democrat Barack Obama and Republican John McCain both promise help for homeowners facing foreclosure.

Obama supports a broader role for government than does McCain. Both envision the Federal Housing Administration providing new, cheaper mortgages to distressed homeowners who otherwise would have difficulty refinancing into more secure government-insured loans with lower monthly payments.

For the plans to work, lenders would have to be willing to take a substantial loss by reducing the amount owed on the loan. But some would have a powerful incentive to do so. A refinancing deal could allow them to recover far more money than they would get from the costly process of foreclosing on the property and trying to resell it.

Obama supports legislation along these lines by Sen. Chris Dodd, D-Conn., that would help about 400,000 homeowners. People would not have to have good credit to qualify as long as they could show they can afford the new payments.

"If the government can bail out investment banks on Wall Street, we can extend a hand to folks who are struggling on Main Street," Obama said.

McCain's plan would provide relief to 200,000 to 400,000 homeowners. The aid would be available only to people who could show they were creditworthy when they got their original loan. The plan offers "every deserving American family or homeowner the opportunity to trade a burdensome mortgage for a manageable loan that reflects the market value of their home," he said.

The FHA piece of the Dodd plan would cost close to $1 billion. The money would come from diverting dollars in the early years from an affordable housing fund financed by the profits of the mortgage companies Fannie Mae and Freddie Mac. McCain's FHA provision is estimated to cost from $3 billion to $10 billion and would mean either cutting federal spending elsewhere or having the government borrow more. The first choice is to trim spending, a McCain aide said.

Experts predict foreclosures will continue to climb well into 2009. Some believe there is a chance for improvement in late 2009, but more think that will not happen until 2010.

A long-term solution is tied to a turnaround in house prices. Slumping home values are blamed for the bulk of the increasing foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth, so they walk away from their homes. Dumping more empty houses on the market adds to the pile of unsold homes, and that drives home prices down further.

"This is uncharted territory," said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School of Business.

Some predict house prices will not climb until the spring selling season of 2010 — at the earliest.

Lawrence Summers, a treasury secretary in the Clinton administration, predicted that more than 2 million foreclosures are coming over the next two years and that as many as 15 million homeowners will owe more than their house is worth.

According to a recent AP-Yahoo News poll, 57 percent of people said housing prices are important to them personally. For many, their home is their biggest asset. As home prices dropped, so did people's net worth — leaving them feeling less financially secure and more gloomy about the direction of the economy.

Which candidate would do a better job of handling housing prices? In the poll, 25 percent said Obama and 17 percent thought McCain. Nearly 30 percent said neither.

Although most voters think the next president will have a "great deal" or "some" influence over housing prices, the reality is there is no quick fix.

"The odds of that are slim to none," said Cal Jillson, political science professor at Southern Methodist University. If the next president can make people more optimistic about the future, "the slow rebuilding of confidence will help to increase home values," he said.

When it comes to handling the broader economy, which is the top concern of voters, the poll found that 32 percent picked Obama and 28 percent went with McCain.

An additional factor is the Federal Reserve, which presidents do not control. If the central bank were to raise interest rates to fend off inflation, the step would increase payments for homeowners whose loan rates are resetting higher. That, in turn, could push up foreclosures. "We are very exposed to interest rate risks and mortgage payment shocks in 2009," Wachter said.

Mortgage rates, including those on 30-year home loans, already are climbing, propelled by inflation worries.

In addition to his FHA proposal, Obama wants to create a $10 billion fund to counsel distressed homeowners before they slide into foreclosure; help people sell homes they bought but could not afford; and team with state governments, community groups and lenders to ensure sure loans can be modified in a timely manner to avoid foreclosure or bankruptcy.

His approach, reflecting the traditional Democratic preference for greater government intervention, would establish a 10 percent mortgage credit for people who do not itemize their taxes. That would provide 10 million homeowners, most of whom earn less than $50,000 a year, with an average of $500 in savings, according to his campaign, and help those struggling to make mortgage payments.

Obama also supports changing bankruptcy laws so homeowners going through that process can renegotiate terms of their mortgages — just as people or investors who own multiple homes or vacation homes can do.

The Illinois senator also wants to combat mortgage fraud and improve mortgage disclosure. Deficiencies in those areas contributed to lax lending that allowed people to take out home loans that their incomes could not support, critics say.

"This kind of transparency won't just make our homeowners more secure, it will make our markets more stable, and keep our economy strong and competitive in the future," Obama said.

McCain prefers a more limited government role in dealing with the housing crisis, a position consistent with traditional GOP leanings. The other component of his plan would have the Justice Department to set up a task force to investigate possible wrongdoing in the mortgage industry. The department has been pursuing cases of fraud and other mortgage-related matters.

"In some cases, lenders and borrowers alike were caught up in the speculative frenzy that has harmed the housing market," the Arizona senator said. "And it is not the responsibility of the American public to spare them from the consequences of their own bad judgment."

Congress is working on legislation that would allow the FHA to help struggling homeowners. Differences have to be worked out between Dodd's plan, still in the Senate, and a similar House-passed proposal by Rep. Barney Frank, D-Mass., and with the White House, too. The White House has threatened a veto but is working behind the scenes with congressional leaders to find common ground.

The plans envisioned by Obama and McCain — and Congress — would deliver short-term help but are not a cure-all, housing experts said.

Long-term strategies are needed to prevent a repeat of the foreclosure crisis, experts said, and that must revamp the regulatory structure to improve oversight of players and borrowers in the mortgage finance system. The debate on such a broad overhaul has already started in Washington and will likely spill over to next president and Congress. Both Obama and McCain have indicated they favor tougher regulation.

How to Buy a Foreclosure

How to Buy a Foreclosure
The price may be right, but be prepared for the hassles.

Michael Lappano knows a home bargain when he sees one. Last year, the Bellevue, Wash., real estate agent purchased a condominium for only $255,000 (including an outstanding lien). That's $65,000 less than what comparable units were selling for, he says. To get the steep discount, he bid on the home at an auction for foreclosures. "The location was perfect, just two traffic lights from my office," says Lappano. He now lives in the sunny two-bedroom, two-bathroom condo with his new wife, Stephanie. And the property is still worth about $315,000, even in the face of a nationwide slump in home prices.

Just over a year after Lappano purchased his home, buyers looking for bargains are eyeing an unprecedented selection of foreclosed luxury houses and condos, in addition to more modest homes. Foreclosures were up 60% in February from a year earlier, according to RealtyTrac, an online listing service. Arizona, California, Florida and Nevada have been hit hardest, but foreclosures are on the increase just about everywhere.

Rick Sharga, marketing director for RealtyTrac, says he hears from brokers that many buyers now begin their home search with a request to look at foreclosures and bank-owned properties. But there's no guarantee that buying a foreclosure will save money compared with buying the traditional way. Discounts vary tremendously depending on where you live. In fact, many foreclosed homes are priced higher than their true value because sellers are trying to pay off the mortgage and cover taxes and transaction costs.

Plus, buying a foreclosure involves homework, patience and often a good measure of luck. If you're buying at auction, you usually need to pay cash. You may face long waiting periods to take possession of the property and move in, and the property could require extensive repairs. Sometimes the former occupants strip the house of all appliances and vandalize the property.

You may also have problems getting accurate information before you buy, says Seattle real estate attorney Richard Llewelyn Jones. "There could be judgments and liens attached to the property or more than one note or deed of trust being foreclosed." In the end, most buyers are turned off by the risks. "If you don't know what you're doing, you could lose your shirt," says Jones.

Getting a discount. If you're game, find an agent who deals with foreclosures. Your agent can locate properties and establish their market value -- which could be very different from the asking price. You will have to pay for any repairs, so build in a generous estimate of what they could cost. Also, you may need a lot of cash because traditional financing may not be an option.

Each state has its own rules governing foreclosures: whether the transaction goes through the court system, what taxes you pay and how much cash you need upfront. To get a summary of your state's law, visit the resource center at online listing service ForeclosurePoint.com.

Also, you generally cannot get title insurance until you take ownership, nor can you expect the title warranties that usually kick in during a traditional home purchase. You need to inspect the title thoroughly, which means paying several hundred dollars for a title search and combing through it to ferret out all outstanding debts. Even so, says Jones, there may be title problems that aren't of record or that appear on the record between the time of your title search and the public sale. Be prepared to pay off old tax liens attached to the home -- and to buy title insurance as soon as you take ownership.

Three ways to buy. Wherever you live, there are three ways to buy a foreclosure: in a presale (before the lender forecloses), at auction or directly from the bank. In a presale, you negotiate with homeowners directly, before their home goes into foreclosure. Although the discount can be as much as 20% to 40% off the property's value, a presale is the riskiest way to buy because deals frequently fall through and title problems are rife. And pre-foreclosure buyers have to add in the cost of an inspection and fork over real estate excise tax, as do those who buy bank-owned property. (Buyers at auction may avoid these costs in some states.)

Buying at a public auction is the most common type of foreclosure purchase. Buyers can expect a discount of 10% to 25% compared with buying a home through traditional channels, says Dean Street, an agent and 30-year veteran of foreclosure buying in the western U.S. But the road to auction can be bumpy, too. For starters, you often cannot inspect the interior of the home. Street says it's vital to see the property even if you can't gain entry. "If there is 300 pounds of garbage in the front yard, there is probably 600 pounds inside," he says. One way to research the interior is to check the local building department's permit records, or have your agent see if a recent listing has information on appearance, layout and previous remodelings.

Another hassle: Most foreclosures that go to auction get postponed, usually due to bankruptcy or loss mitigation (when the bank tries to compromise with the borrower), says Chris Matty, marketing director of ForeclosurePoint.com. He notes that opening bids also change frequently, especially as home values are marked down further.

The winning bidder will pay for the property and take ownership within a set period of time, which varies according to state law. But you're not out of the woods yet. Some states, such as North Carolina, give former homeowners a chance to buy the property back. Sometimes foreclosure buyers have to start eviction proceedings; once the house is vacant, you usually have to schedule repairs.

Work with the lender? If no one buys a property at the auction, it usually ends up back with the bank. Banks have a lot of these real estate owned, or REO, properties in their portfolios and are actively trying to sell them through agents. And unlike buying at auction, you can usually get a traditional mortgage for an REO. Unfortunately, lenders often list the property at or near market value to recover the outstanding loan amount along with legal fees, property taxes and maintenance costs.

But an experienced foreclosure broker can negotiate aggressively with a bank, especially when the property has been listed for a year or more. Plus, banks trying to sell foreclosures sometimes offer highly competitive financing packages to buyers, including low down payments and attractive rates. As home values decline, some lenders are willing to negotiate a "short sale," in which the property is sold for less than the debt owed on the house. That's one way foreclosure buyers can profit. In some markets, the discount is as much as 25%; but where there's less inventory, the discount can be smaller.

You can find REOs through real estate agents. Or approach local banks or mortgage brokers directly and let them know you are prepared to buy a property "as is" with cash and request a discount from the asking price. Banks sometimes pay to remodel properties to improve their value. But with so much inventory on their books right now, most lenders want to unload foreclosed homes quickly, without having to refurbish them.

Housing Crunch: It'll Get Worse

Hard hit cities like Sacramento, Phoenix and Las Vegas are set for more steep losses. Some real estate experts are bracing for price drops of as much as 50%.
NEW YORK (CNNMoney.com) -- With home prices plunging by more than 30% in some markets, bargain-hunters are ready to pounce.

But it may pay for buyers to wait. Many housing experts say that the worst-hit metro areas have even farther to fall, and could see total drops of as much as 50%.

"The housing boom was unprecedented in U.S. history," said Michael Youngblood, a portfolio analyst with FBR Investment Management, "and the correction will be as well."

High-end housing crunch, 90210

Many erstwhile bubble cities have sustained particularly brutal hits. The median- price of a home in Sacramento, Calif. was down 35% during the three months ended May 31 compared to the same period last year, according to the real estate web site Trulia.com. In Riverside, Calif. prices fell 29%, while San Diego prices dropped 26%.

Smaller cities in California's Central Valley, such as Stockton (-39%), Modesto (-37%) and Bakersfield (-29%), also recorded steep declines.

Outside California, hard-hit markets include Phoenix (-18.8%), Las Vegas (-22%), West Palm Beach, Fla. (-32%) and Cape Coral, Fla. (-35%).

Youngblood expects that these markets will likely endure total price drops of 50% or more.

The smart money
Indeed, prices are falling faster and further than in any other post-war housing bust. During the bust in Austin, Tex., which started in 1986 and is one of the worst on record, prices fell 25%, according to Local Market Monitor, a financial data provider. And that cycle took four years to bottom out.

In other major downturns, prices in Los Angeles fell by 21% during a six-year period in the 1990s, and Honolulu home prices saw a decline of 16% in the five years starting in 1994.

Youngblood's forecast "is quite plausible," said Nicholas Perna, of the economic consulting firm Perna Associates. He finds it especially significant that the smart money, investors in the S&P Case/Shiller Home Price Index, are still buying futures as if they expect prices to continue to plummet.

The index, which tracks the sale price of specific homes as they are sold and resold over the years, is considered to be one of the most accurate home price indicators.

"The people who are putting their money where their mouths are," said Perna, "are betting on more losses."

Specifically, Case/Shiller investors are betting that Las Vegas prices will fall an additional 22% by November 2009. Los Angeles futures predict a further loss of 24.2% through November 2009, while investors expect to see Miami down another 21.6% by then.

These markets may have a hard time recovering because, according to Perna, people are afraid to buy right now, because they're concerned about over-paying. That helps explain why price depreciation seems to be accelerating.

"The most severe declines are happening right now," said Mark Zandi, chief economist for Moody's Economy.com.

Prices vs. wages
This correction was inevitable, in Youngblood's opinion; home price gains had simply out-paced income by far too much to be sustained.

Historically, home prices have averaged about four times wages. Whenever homes got significantly more expensive, people could not afford to buy and home prices fell back.

But local price-to-income ratios are still out of whack even after steep price declines, which means prices have further to fall. In Los Angeles, where the ratio peaked at 22.7, according to Youngblood, it's still in the high teens. Home prices would have to come down another 40% or so to get that ratio back into the single digits.

And it's not just the housing fundamentals that lead Youngblood to expect more drops; he also cites the local economic conditions.

"Bubble cities are now seeing fleeing employment conditions," he said. In Miami, the unemployment rate rose 34.3% between April 2007 and April 2008, according to Youngblood. And the job picture in California cities, where many jobs were housing related, has been even more disastrous.

Housing was a key economic engine for towns like Riverside, Stockton and Modesto during the boom, according to Zandi. Builders, real estate salespeople, mortgage brokers and lenders, and even retailers, like Home Depot (HD, Fortune 500) and Lowe's (LOW, Fortune 500), depended on growth in the sector.

"In all those deteriorating housing markets, it's a double hit," he said.

Ten of the 11 cities with the highest unemployment rates in the nation are now in central California, with El Centro , at 18.4% in April, leading the way. Other double-digit disaster areas were in Merced (12.3%), Yuba City (11.8%), Modesto (10.7%), Visalia (10.3%), Hanford (10.2%) and Fresno (10%).
Many of these cities are also among the leaders in foreclosure rates. As more foreclosed properties hit the market, prices are further depressed.

"[The price drops] reflect a wave of distressed sales of [bank-owned] properties and discouraged sellers," said Zandi

The brighter side
Not all analysts are pessimistic. Richard DeKaser, chief economist for National City Corp (NCC, Fortune 500) points out that, thanks to the price declines, the national market is the most affordable it's been in years.

With the national median price of a single family home at $204,229, mortgage rates around 6% and the average household earning nearly $50,000, the average home buyer spent about 23.2% of their income on housing during the first quarter of 2008. That's down from 2006, when homeowners spent an average of 29% of their income on housing.

Nariman Behravesh, an economist with Global Insight, says that while he expects home prices to stagnate for the next five years, Youngblood's 50% price decline forecast is "a little extreme."

But that target is realistic, Behravesh says, after taking inflation into account. In markets where prices have fallen 35% or more, and remain depressed through five years of 4% inflation, home prices in real dollars will absorb an additional 20%-plus hit. That would push price declines to over 50%.

Of course, there are plenty of wild cards that could affect home price trends, such as the election, Congressional legislation, unemployment, gas prices, and interest rates.

"This whole market is fraught with all sorts of implications," said Perna, "and it ain't over until it's over."