KENNETH R. HARNEY, Washington Post Writers Group
July 1, 2007
Interest rates of 6.75 percent and higher needn't be impediments. Talk to veteran mortgage or real estate professionals who've worked through double-digit and high single-digit rates and negative prices in the 1980s and early '90s, and you'll get some valuable perspective.
"It's really back to the future," said Paul E. Skeens, owner of Carteret Mortgage Corp.'s branch in Waldorf, Md. "We're headed back to a more normal cycle" after the feeding frenzies of the boom years. "The crazy stuff may be gone, but the old solutions still work great."
For buyers with limited cash and borderline credit who might have signed up for a zero-down subprime mortgage two years ago, Skeens recommends a program available nationwide through mortgage investor Freddie Mac. It's called "Home Possible" and comes in variations including the zero-down-payment "Home Possible 100." According to Freddie's Web site, the program allows seller contributions up to 3 percent of the total costs and does not require a set amount of reserves by borrowers. The maximum loan amount is $417,000.
The "back to the future" aspect is that, unlike the razzle-dazzle, stated-income underwriting at the height of the boom, Freddie Mac requires applicants to qualify through its traditional "Loan Prospector" automated underwriting system. This means that borrowers generally need FICO credit scores of 620 or higher and must be prepared to verify income and employment. For applicants with nontraditional credit histories and resulting artificially depressed credit scores, Freddie Mac will accept old-fashioned "manual" underwriting, as well as look at nontraditional credit records such as rent histories and utility payments. This is a key feature for first-time buyers with slim credit files or little banking experience.
Skeens is bullish on the oldest mortgage program around -- loans backed by the Federal Housing Administration -- for refinancings out of less consumer-friendly mortgages. Once Congress passes legislation allowing zero down payments and 40-year terms, "we'll be doing a lot more FHA loans for home purchasers," he said. FHA loans require 3 percent down, as well as employment, income and asset verifications. They come with lower rates than subprime loans and no prepayment penalties.
Sellers and buyers should be looking closely at another time-tested technique -- rate buydowns. James Svinth, chief operating officer of LendingTree Loans in Irvine, Calif., says his firm is seeing a rise in transactions where sellers subsidize the rate on their buyers' mortgages for the first two to three years in exchange for an upfront payment by the seller to the lender.
The underlying mortgage can take almost any form -- fixed-rate, adjustable, interest-only or a hybrid -- but the net result is the same: The loan rate is reduced to a more affordable level for a period of years as a concession to the buyer.
Svinth says that heads-up sellers -- and their agents -- should consider advertising the availability of buydowns to bring in purchasers. "It's a very effective tool, and just about any lender can arrange it."
Still another concept: Seller "takebacks" or "carrybacks." A mainstay of the financing toolbox in the hyperinflationary periods of the 1980s -- when conventional mortgages for buyers with good credit topped 15 percent -- seller takebacks are deferred-payment notes offered by sellers on attractive terms to help buyers .
Properly structured and documented by experienced attorneys or investors, takeback notes are readily saleable for cash in the secondary note marketplace. Sellers also can hold on to them as win-win investments, pocketing steady income. A sign that this form of private financing may be poised for a big expansion was the recent acquisition of CircleLending LLC, a privately held Waltham, Mass.-based company specializing in intrafamily and seller takeback financing by billionaire Richard Branson's Virgin Group PLC.
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