Mortgage bankers are eagerly going back to basics before Congress makes them.
At the annual convention of the Mortgage Bankers Association, or MBA, the most oft-spoken phrase was "back to basics." No matter what you were doing walking past a shoeshine stand, staring mutely at your shoes in an elevator or waiting in line for lunch you heard someone uttering "back to basics."
That means the home loan du jour conforms to standards set by mortgage giants Fannie Mae and Freddie Mac: It isn't a jumbo (a mortgage for more than $417,000), isn't subprime (for a borrower with iffy credit), and it has a fixed rate. Preferably, the borrower totes a good-size down payment (if buying) or sports serious equity (if refinancing).
If the mortgage business is going back to basics, then, by definition, it wandered away from the basics. Indeed, that's what happened.
In 2003, about 9 percent of mortgages (in dollar terms) were subprime; last year, about one-quarter of mortgages were subprime, according to the Government Accountability Office.
The growth was even more explosive for Alt-A mortgages nontraditional home loans for which the borrower doesn't document income or is required to pay only interest and not principal. In 2003, one in 50 mortgages were Alt-A; in 2006, they made up about one in six.
Almost half of homebuyers last year made down payments of 5 percent or less, according to Credit Suisse.
Now the housing bubble has burst, and home prices are falling. Foreclosures are surging. In response, lenders have pulled back. Subprime loans are drying up, more borrowers are asked to document their incomes, many lenders require bigger down payments than they used to and jumbo loans have higher rates.
"We're getting back to basics. You'll find that the loans that are originated in the last half of 2007 will be very different from what were originated in 2006 and the first half of 2007," said Michael Gross, managing director of loan administration for Countrywide Financial Corp., at a panel discussion from the annual convention of the MBA in Boston.
Bob Moulton, president of Americana Mortgage, based in Manhasset, N.Y., said plain-vanilla fixed-rate mortgages are reviving because they "worked for a hundred years. Then, when the exotics came out, we got creative. The homeowner wanted that house. They probably should have continued to rent."