STATUS OF THE MORTGAGE MARKET

We've all heard a lot of press lately about sub-prime loans and the failures in the mortgage industry that that those loans are causing. In addition you may have heard about Alt-a loans as well. Let's start with some definitions. A loan is considered sub-prime if any of the following characteristics are true: 1 the borrower has a low FICO score; 2 in order to qualify for the loan, expanded debt to income ratios are used in; 3 if in order to verify income, the borrower provides documentation of a non-standard type. An example of a non-standard income verification would be providing copies of bank statements to show cash flow but not providing W-2s to verify the source of those cash flows. As it pertains to debt to income ratios, lenders like to see the PITI (principal interest taxes and insurance) payment be not more than 28% of the borrower's gross monthly income and the borrower's total debt payment (house payment plus car payment plus credit card payments etc.) to be not over 36 to 38% of gross monthly income.

An Alt a loan is a type of sub-prime loan where the borrower has a very good FICO score but has no ability to verify income through the normal W-2 process. A good example might be a self-employed person who does not yet have two years worth of records to verify income. It could be a doctor right out of college or it could be a person changing careers to become self-employed. It could be a divorcee who received a lump payment but is not yet established monthly income. Another example could be a person who has just retired and has a home to sell. They are very comfortable that home will sell and fully intend to use the entire proceeds of the sale to pay off the new home. All are pretty good reasons, but the point is there is no traditional means of verifying income.

The recent announcement from American Home Mortgage that they are filing for bankruptcy certainly sent a shockwave through the mortgage industry. Countrywide, which is one of the nation's largest mortgage lenders, needed to borrow $11.2 billion in order to fund loans. In order to obtain that line of credit, Countrywide needed to work with 40 banks around the world. One of the important things to notice is that neither one of these companies are banks. That is these companies rely solely on income from the mortgage industry. Banks on the other hand have a more diversified lending portfolio with car loans, business loans, personal loans etc.

If you are a buyer right now, it's very important for you to be certain that your lender is going to be able to close and fund your loan. The fact that you have a loan commitment letter from your lender won't mean a thing if they file bankruptcy. If you are a seller, is just as important to you become aware of where the buyer is getting their loan. I think it'll be much more common to have sellers counter-offer asking for more information on the lender, and that certainly has not been an area often discussed in the past.

We are pretty lucky here in Durango because our foreclosure rate is so low. At Team Lorenz we do very few sub-prime loans but we have done a number of Alt-A loans. I believe that in the Durango real estate market we have a large number of very financially capable clients that have shown they are fiscally mindful of their financial obligations.