RateWatch #382 – Liberal Lending
 
November 22, 2003 by Dick Lepre
dicklepre@rpm-mortgage.com

What's Happening

With attention dissipated by Bush/Blair, Jacko, Scott Peterson, the Kennedy assassination and
The Cat in the Hat it may be difficult to get attention regarding the economy but here goes.

Data released Thursday showed the economy on the road to recovery - Initial Jobless Claims
were 355,000. Leading Economic Indicators (a predictor of future economic activity) were
+0.4%.  That said, Fed member Moskow says "inflation unlikely to increase significantly" due to unused capacity and high unemployment. Statements by the Fed noting the containment of inflation are not news.  Everyone knows that inflation has been contained for a long time.  These statements lay the groundwork for the Fed hiking rates.  Most importantly, for those of us interested in mortgage rates is the fact that all of this is anticipated. A series of Fed hikes - even though they
might not start until mid or late 2004 is not going to lead to constantly increasing Treasury yields and mortgage rates.

In the short term, the Treasury markets seem to be preoccupied by talk about terrorism.  Any rumor or fact is going to send Treasury prices up and yields down.  This creates anxiety
for those holding  short positions.

Liberal Lending

Something interesting has happened in the mortgage industry.  Because of the steroidal expansion of capacity with the refi boom of the early months of the year the business needs more loans.

We are starting to see securitization of loans with more liberal underwriting.

Ratios.  What Ratios?

Years ago, lenders were concerned about "ratios." By "ratios" we mean housing and debt ratios.  Your housing ration is your PITI  - principal, interest, tax and insurance divided by your income.  Your debt ratio is your (PITI + consumer debt)/your income. In good old times underwriters wanted a housing ratio under 28 and a debt ratio under 36.

These numbers are no longer of very much consequence. The FNMA Desktop Underwriting system bases its decision more on credit scores than anything else.  In short, if you have good credit and good equity in the property who cares what your income really is?  An understanding
is that the way that mortgage lenders tend to underwrite income is fairly conservative.  The FNMA DU system relies on the empirical evidence that folks who have, say, 750 credit scores and a loan-to-value ratio of 60% are going to make their mortgage payment.

The point of this is the following:  if you want to buy a home now do not let that old 28/36 rule
stop you.

Even if you do not have great credit and have no money saved for down-payment we can still help.

We have 100% financing available to anyone even with modest credit.  If you have credit scores of 640 we can get you 100% financing with stated income. You can borrow up to $500,000 with no down payment and even have the seller cover the non-recurring closing costs.  This is a stated income loan. This must be owner-occupied and must be SFR or a condo. NO high-rise condos (greater than 4 stories). And no small condo projects (fewer than 4 units).

This is great for folks who have been renting and want to buy.  This is also a great loan if you
own a property and have been thinking of selling it to the tenants to get your cash out but they
do not have the money for the down payment.  You get your equity.  They get the house.  A
win-win situation (except for the moving company).

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