As mortgage industry adjusts to credit crunch, so do borrowers

WASHINGTON — Mortgages are complicated, and lending markets are in flux right now, but savvy, well-positioned consumers can still get the loans they need to buy, build or refinance a home. They just need to pay attention to what's going on, says David Reed, a lending veteran based in Texas and co-author of "Mortgage Confidential." This is an edited transcript of a recent conversation with Reed about the mortgage industry.

Q. What's your take on the mortgage market right now?

A. For a while, a lot of individual lenders' guidelines just became too relaxed — lower minimum credit scores, no money down, no stated income, no stated assets. I've been shaking my head at these loan products.

Now, things are turning back to the old-fashioned way, which is fine with me. There was a period where every applicant wanted no money down. If you have to sell a year later, you're upside down. What snuck up on a lot of people is the equity position. They assumed they could just refinance down the road. Well, no you can't if the equity isn't there.

Q. What about the subprime market?

A. Subprime will come back. It fills a need in the industry. People get divorced, they have medical bills. They still need a place to live. With subprime, a lender says, "We'll make you a loan, but in return, we want more money down or a higher rate."

But lenders just got too greedy. They were putting loan programs out there that just flat-out shouldn't have been out there.

They began to reduce their requirements, lowering their standards bit by bit. All of these products have been around a long time, but when you put them together, you get trouble. You never know what one thing is going to trip it. In this case, it was declining property values. Suddenly, you're swimming with alligators.

Q. Jumbo-loan borrowers are also in a bit of a pinch right now. What do you think is going on there?

A. Jumbo borrowers got caught in the crossfire. The spread between a jumbo loan and a conforming one is about 1 percent now; it's usually about a quarter of a percent. Historically, jumbo loans have a much lower default rate than other loans. They're rich people. They have good credit. That will slowly but surely come back. That will come back before subprime.

Q. If someone falls in either category, should they wait before buying or refinancing? How long?

A. Subprime guidelines have been rolled back about three years. You're going to be paying a down payment. You're going to have to save up your money, document your income, maybe wait a little bit. Understand that it's going to be OK for someone to look at your bank statement. Depending on the loan amount, consider an FHA loan. That's not subprime, but their credit guidelines are relaxed. Of course, that is also a full-doc loan.

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