Judy & Bob Vogel

What Credit Crisis?

For the last two weeks we have been hearing about the “Credit Crisis” and how it is difficult for even the best borrowers to get credit.  Fortunately that is a false statement where mortgages are concerned.

Here is a condensed version of what the credit crisis or crunch really is.  Banks and other financial institutions are not lending to each other.  Why?  Basically because they do not trust the other will be around long enough to pay the debt back, this is evident in the LIBOR rate which is the rate banks use when lending to each other as well as the starting point to many Adjustable Rate Mortgages.  Banks are so leery to lend to each other that the LIBOR has raised dramatically to historic highs.

“The cost of overnight borrowing in dollars rose Monday, with the London interbank offered rate, or Libor, jumping to 2.36875% from 1.99625% Friday, according to the British Bankers Association”

Market Watch October 6, 2008

If you listen to the news or read the paper you will find politicians and financial specialist talking about the deepening burden of reduced lending.  They will always quote commercial paper, car loans, as well as student loans but rarely if ever mention a mortgage.  The reason is mortgages today that follow more common sense lending standards have a place in the secondary market.  Today most loans are packaged and sold after closing to Fannie Mae, Freddie Mac, or Ginnie Mae.  When lenders know they can sell these loans in the secondary market they have reduced their risk as well as freed up more funds to loan back out.  This can not be said for other types of loans which the financial institution must now carry on their books which reduce the amount of money they have available to lend.  (There is more involved in the process as well as liquidity requirements but as a condensed view it’s fine.)

But what does this really mean to you when getting a mortgage?  As far as mortgages are concerned money is available, and available in abundance.  What has changed, are the types of mortgages allowed and the elimination of the lenient credit guidelines.  The days of getting a home mortgage just by proving you had a pulse is long over but mortgage loans for those with the actual ability to repay the mortgage will have little difficulty in finding a mortgage.

To take advantage of the many deals available to home buyers today you will need to realize what lender are actually looking for. 

The most important thing right now to a lender is your ability to repay the loan.  This may sound funny but this concept had been lost in the shuffle over the last few years.  Lenders will now concentrate on your credit as a way of determining your future spending and debt handling ability by your past performance.  Today you will also need to have a down payment ranging from 3% to 10% depending on the type of mortgage you will be applying for.  During the housing boom down payments virtually disappeared with the implementation of 100% mortgages but lenders have found that borrowers with little personal investment into a home have far less incentive to pay their mortgages in difficult times.  Finally, and in my opinion one of the most important factors is the borrowers debt to income ratio.  This ratio is the difference between what your gross monthly income is versus your monthly reoccurring debt.  During the days of lax lending policies it was not uncommon to have loans approved with 60% of the borrowers before tax income being used for to pay the mortgage and other reoccurring debt.  A certain recipe for disaster which is one of the many reasons we are in this crisis to begin with.

A more reasonable level of debt to income should be approximately 38% of your monthly gross income though I am still seeing mortgage approvals at levels much higher but I would caution against confusing approvability versus affordability.

So, is there really a credit crisis when it comes to a mortgage?  If you believe we need to go back to exotic lending and mortgage products available even to those who cannot possibly repay the debt, then yes we are in a crisis.  However, if you are looking for a mortgage to purchase a home that you can actually afford to live in, raise a family, or retire, then there is more than enough credit available if you qualify with the traditional lending guidelines.