With adjustable-rate and subprime loans all but dried up, brokers and lenders have found a lifeline within the economic stimulus package signed into law earlier this year.
The package, which included tax rebates and other economic incentives, raised the limit for mortgages insured by the Federal Housing Administration.
FHA loans, traditionally given to first-time home buyers and borrowers with troubled credit, now can be made for up to $729,750, up from $364,000. The temporary lift is designed to aid troubled borrowers.
It’s also providing a line of business to brokers who’ve been decimated by last year’s mortgage crash.
“We hardly ever did any government loans before they raised the limit,” said Yadi Paige, a broker with A & G; Western Financial Services in Santa Ana.
The government-backed loans have easier rules for buyers, typically allowing lower credit scores and a 3% down payment. Lenders like them because they’re insured.
The eased guidelines also cover loans that conform to standards set by government-backed mortgage buyers Fannie Mae and Freddie Mac, which are struggling with financial problems of their own.
Mortgage broker Paige said her business has been almost exclusively FHA loans since the limit was raised last spring.
Many of her potential customers have met income and credit score requirements for the loans, Paige said. But falling home prices have disqualified some because of rules covering the amount of equity borrowers have to have in their homes, she said.
“Everyone is scared of falling home prices,” Paige said.
Banks have been lending less and requiring higher credit scores for loans, she said.
Subprime Markets Gone
Another source of business for lenders are people looking to switch from adjustable-rate loans to fixed-rate loans, said Mitchell Redden, a regional sales manager in San Francisco-based Wells Fargo & Co.’s Laguna Beach office.
“Some people want to move into fixed rate while the opportunity is good,” he said.
Those borrowers are betting that interest rates are going up as the Federal Reserve switches its focus from the slowing economy to high fuel, food and other prices.
The central bank’s seven interest rate cuts since September have done little to revive the mortgage market, which is bogged down with record defaults and problems, according to analysts.
“Credit is tight,” said Michelle Ashworth, a managing director of secondary marketing with North Carolina-based Wachovia Corp.’s local operations.
The subprime market for people with the weak credit histories is almost completely gone, Ashworth said, as is most of what was considered Alt-A for people with credit histories in between subprime and the best borrowers.
That’s had a big impact on companies such as Newport Beach’s Downey Financial Corp., which specialized in Alt-A adjustable loans.
Many of Downey’s borrowers were in the Alt-A category and took out option adjustable-rate mortgages that allow credit card-style minimum payments.
Two-thirds of the foreclosures in the fourth quarter were from adjustable loans, according to Washington, D.C.-based Mortgage Bankers Association.
Defaults in Downey’s loans have helped put 15.5% of its assets, mostly mortgages, into the “non-performing” category, according to the company.
Downey set up a “borrower retention program” to help potentially troubled mortgage holders refinance when their rates reset to higher levels.
Borrowers with adjustable-rate loans that are resetting to higher monthly payments have been some of the most eager to take advantage of the raised limits as they seek to refinance.
About 86% of the borrowers in the program had made all of their payments, Downey said in a recent release.
Downey also has cut back on making option adjustable-rate mortgages. For the second quarter it said the loans declined $721 million from the end of March and make up 57% of its home loans compared to 76% a year earlier.
