Rather than exiting the market, lenders have simply retooled their guidelines, turning their backs on riskier lending as they actively court qualified buyers. "Banks still need to make loans if they want to make money," said Steve Maizes, chief executive officer of the California office of Olympia West Mortgage. The key is in the creditworthiness of the borrower.
"If you can prove income and have good credit, there should be no problem for you," said Bob Barron, a mortgage planner in the Solana Beach, Calif., office of Mortgage Loan Specialists Inc. "We're just going back to sane underwriting. Prove that you make the money to qualify for the house and pay your bills on time, and you will qualify for the loan. "
It's a shift, said Bank of America's Mike Hegna, that has come in the last couple of months. Hegna, a senior vice president for consumer real estate lending, said the bank's production of so-called jumbo loans, or loans of greater than $417,000, in his market area had jumped by 30% to 40% since early September.
The "sane underwriting" Barron mentioned includes plenty of supporting material in a loan application.
"Lenders want to see employed people, pay stubs, they want to see assets in the bank and FICO (Fair Isaac & Co. credit rating) scores of about 650, 660 and up," said Les Berman, president of EB Financial, a mortgage brokerage in Beverly Hills, Calif. "Over half the population has scores in that range. In the jumbo, we have a lot more stated income money coming back to the market, but they have to score generally above 700."
For qualified first-mortgage borrowers, the loan products available have stayed basically unchanged since the market slowdown started at the beginning of the year. Lenders are still writing adjustable-rate loans of five and seven years, after which rates shift to the prevailing rate; 30-year mortgages are also being written.
Some mortgage brokers said rates for seven-year jumbo loans were close to 6% for borrowers with solid credit who put 10% equity into the purchase, provided they could document their income history.
The generally upbeat view isn't just sales hype from mortgage brokers whose business is starting to creep back up after falling, in some cases, by as much as 80% in the last six months.
"The jumbo is maybe even better than it was -- rates have come down (since October)," said Jay Prag, a professor of finance at the Drucker School of the Claremont Graduate University. "Banks and other lenders need to lend to somebody, and the subprime collapse took away the taste for risky loans."
The availability of both jumbo and conforming loans for qualified buyers, he said, reflects a flight to quality.
"If I put 20% down on a $1 million house" he said, "I have an incentive not to screw up."
What has disappeared, Berman said, are loans for borrowers who didn't document either income or assets. "That doesn't exist anymore. You need stated income with verified assets. Borrowers can still state the income, but they have to have six to 12 months' worth of mortgage reserves."
But if the borrower can't show steady income, known as stated income in the lending business, those rates can still be had -- for a price.
Maizes used the hypothetical example of a lawyer at a big firm. That buyer, he said, would typically be able to put down 15% of the purchase price of a $1.5 million home. That equity, combined with the steady, documented work history and a solid credit rating, would allow the borrower to get a seven-year loan at close to 6% if that person paid a point, or 1% of the loan, at closing.
A buyer looking at the same home who had solid credit and assets but only offered "stated," or undocumented, income could get the same rate by putting down 20% of the home's value as equity, Maizes said.
The prospects for second mortgages are also less rosy, said Victoria Johnson, president and owner of San Diego-based Luxury Loans Inc.
"Now there is no such thing as stated-income second mortgage," she said. "And even with documentation it's still somewhat limited." That's because of two key factors, she said: Wall Street is not buying the paper and home values are declining in certain markets.