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Mortgage bankers go back to basics bankrate.comThursday, November 15, 2007 By HOLDEN LEWIS Mortgage bankers are eagerly going back to basics before Congress makes them. At the annual convention of the Mortgage Bankers Association, or MBA, the most oft-spoken phrase was "back to basics." No matter what you were doing -- walking past a shoeshine stand, staring mutely at your shoes in an elevator or waiting in line for lunch -- you heard someone uttering "back to basics." That means the home loan du jour conforms to standards set by mortgage giants Fannie Mae and Freddie Mac: It isn't a jumbo (a mortgage for more than $417,000), isn't subprime (for a borrower with iffy credit), and it has a fixed rate. Preferably, the borrower totes a good-size down payment (if buying) or sports serious equity (if refinancing). If the mortgage business is going back to basics, then, by definition, it wandered away from the basics. Indeed, that's what happened. In 2003, about 9 percent of mortgages (in dollar terms) were subprime; last year, about one-quarter of mortgages were subprime, according to the Government Accountability Office. The growth was even more explosive for Alt-A mortgages -- nontraditional home loans for which the borrower doesn't document income or is required to pay only interest and not principal. In 2003, 1 in 50 mortgages were Alt-A; in 2006, they made up about 1 in 6. Almost half of homebuyers last year made down payments of 5 percent or less, according to Credit Suisse. Now the housing bubble has burst and home prices are falling. Foreclosures are surging. In response, lenders have pulled back. Subprime loans are drying up, more borrowers are asked to document their incomes, many lenders require bigger down payments than they used to, and jumbo loans have higher rates. "We're getting back to basics. You'll find that the loans that are originated in the last half of 2007 will be very different from what were originated in 2006 and the first half of 2007," said Michael Gross, managing director of loan administration for Countrywide Financial Corp., at a panel discussion from the annual convention of the MBA in Boston. Bob Moulton, president of Manhasset, N.Y.-based Americana Mortgage, said plain-vanilla fixed-rate mortgages are reviving because they "worked for a hundred years. Then, when the exotics came out, we got creative. The homeowner wanted that house. They probably should have continued to rent." The 30-year fixed has been in widespread existence since 1934 -- and it was introduced by the federal government as part of a bailout during a foreclosure crisis. In a research report for the Federal Reserve Bank of America, authors Matthew Chambers, Carlos Garriga and Don E. Schlagenhauf wrote: "Prior to the Great Depression, the typical mortgage contract had a maturity of less than 10 years, a loan-to-value ratio of about 50 percent, repayment of interest only during the life of the contract and a balloon payment at expiration." Except for the low loan-to-value ratios, mortgages in the early part of the 20th century were similar to the subprime and interest-only loans that were all the rage in the first years of this century. In both eras, interest-only loans were popular. In both eras, the mortgages were time bombs: In the early 1900s, the entire loan amount was due in a lump sum after a few years; in the early 2000s, the initial interest rate on an ARM was due to skyrocket after a few years. In both eras, homeowners were expected to refinance themselves out of peril. And in both eras, home values plummeted in some parts of the country, trapping people in loans for more than their houses were worth, unable to refinance. In 1933, the federal government created an agency called the Home Owners Loan Corp., or HOLC, which within three years bought one-fifth of the nation's residential mortgages. The HOLC bailed out the owners by converting their loans to something novel: long-term, fixed-rate, amortizing mortgages. The federal government followed up by creating the Federal Housing Administration in 1934, and the 30-year-fixed with a small down payment quickly became the dominant mortgage for home purchases. The Depression-era government bailout of delinquent homeowners succeeded, and the homeownership rate climbed rapidly for three decades. This time around, the mortgage industry is wary of government intervention, as if it had never worked before. At this MBA convention, whenever bankers discussed the prospect of tighter regulations, they did so in tones of warning and foreboding. "We're going to have legislation, and it's going to be big," said Mike McQuiggan, CEO of Tri-Emerald Financial Group, a Lake Forest, Calif.-based lender. You can guess what McQuiggan said next: "The future is back to basics." X...X...X The benchmark 30-year fixed-rate mortgage fell 2 basis points to 6.32 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.34 discount and origination points. One year ago, the mortgage index was 6.24 percent; four weeks ago, it was 6.49 percent. The benchmark 15-year fixed-rate mortgage fell 6 basis points to 5.98 percent. The benchmark 5/1 adjustable-rate mortgage rose 1 basis points to 6.19 percent.
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