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November 23, 2007
Adventures in the Mortgage Trenches
One hundred pages of high-level gloss from me, the FT, the WSJ, and everywhere else on the mortgage market don't beat one good I-Was-There piece from someone currently trying to get a mortgage.
Two days before we were to sign papers (last week) my lender called me to say our county had been declared a declining market. I would need to put down 15%, and not the 10% we had both agreed to.
They did everything in their power to try and make me agree to the new terms. I did everything in my power to say no, and get them agree to the terms initially agreed upon.
By Monday it looked like the deal was falling apart. I just wasn't going to pay the extra 5%. Especially when they changed the rules 2 days before I was suppose to sign papers. That seemed like a bait an switch to me. And I told them so.
The other thing that was pissing me off was the amount of time my credit had been run for this house. Seven times!
- Once by Countrywide to pre-approve me to even start the process;
- Twice by my lender;
- and four more times by the companies my lender tried to shop my loan to.
I was pissed.
Since they were running my credit steadily for more than a month, rather than over a short amount of time - I told them I thought they were trying to damage my ability to gain credit from other sources.
Read the whole thing.
To put things in context and be fair, a 15% downpayment really isn't that bad in historical terms, so let's be clear on that. And so going from a 10%-15% downpayment really shouldn't trouble anyone who's spent much time securing a mortgage, and it could even see as worrisomely low if you were thinking that things had tightened up out there. Ending up at 6.5% interest rate on 15% down is more than enough to convince credit market worriers that not enough has really changed out there.
To return to the point, however, why the velocity in the changes? Just because. We are in, as they say, a fluid situation in credit markets, and lenders are nervous. Recent business lending surveys have shown similar flights to (perceived) quality, with credit requirements tightening, a general sense that collateral must be liquid, and lower leverage ratios. That's the way the game is played at this stage in the credit cycle; it just happens faster when the cycle is being fueled by a one-off crisis.
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Boo-hoo! Since when do people expect to be able to put only 10% down? (The minimum down payment is 30% here in China.)
I think this is indicative of the number of people attempting to purchase a home on shaky finances in overpriced markets.
10-15% doesn't sound like much in theory, but if you had trouble coming up with $25k on a $250k house, chances are you don't have another $12k laying around.
As for the person's comment on the # of inquiries reducing his credit score, that's actually false since the FICO scoring system counts multiple inquiries over the course of 30 days as a single inquiry, provided it's for the same purpose: Auto Loan, Home Loan, etc.
-M
A 15% down payment does sound unreasonable for the Bay Area housing market. Many families can't easily come up with that kind of cash without making big sacrifices. You're right in that the mortgage industry is cycling from unreasonably low credit requirements to much higher standards. When working in the consumer lending business in the mid 1990's, I often heard "horror stories" about the 1980's market boom and bust, when lenders required only a 1% or 2% down payment- imagine that! It's amazing that so many experts, including Greenspan, expressed surprise at the scope of this crisis when we knew from past booms what constitutes irresponsible lending practices. This isn't rocket science.
There’s more fallout from the subprime mortgage debacle. The NewsVisual article on Freddie Mac http://www.newsvisual.com/newsvisual/2007/11/knowledge-map-s.html talks about the company’s plan to issue $5 billion in preferred stock in order to raise capital the company requires to offset its huge losses in the subprime market.