Conventional Mortgage Has Lenders Competing

Conventional Mortgage Has Lenders Competing

by Jilian MincerSaturday, September 1, 2007

While subprime and jumbo mortgage loans are drying up, there is plenty of cash flowing to borrowers with stellar credit who want conventional fixed-rate mortgages.

Banks and credit unions are battling for these customers with fee waivers, competitive interest rates and a willingness to negotiate on rates that have dropped in the past three months.

"I've talked to many banks who are anxious to lend," says James Chessen, chief economist for the American Bankers Association in Washington. "A good credit risk will always have access to funds at the best rates in the market."

This summer's subprime crisis has tightened lending standards, making it extremely difficult for borrowers with less than perfect credit to get a mortgage, especially if they are stretching to afford their first home.
Even consumers with solid credit scores and high incomes are now finding it more difficult and more expensive to find jumbo mortgage loans, which are loans of more than $417,000. A mortgage that large is often necessary on either coast because of high home costs.

But individuals with good credit and a down payment are in the driver's seat at a time when the average 30-year fixed rate mortgage on a loan of less than $417,000 was 6.5% yesterday, according to Bankrate.com's benchmark 30-year fixed rate. The bigger the down payment, the more the borrower's negotiating strength.

One reason for the current strong market for conventional, or "conforming," mortgages is that there is plenty of cash to lend because "investors are willing to invest in these sectors," says Joe Rogers, executive vice president at Wells Fargo Home Mortgage.
They know, he says, that borrowers need to meet standards set by Fannie Mae and Freddie Mac, the government-sponsored housing finance agencies that purchase conventional mortgages and repackage them into mortgage bonds to sell to investors.

Bill Hampel, chief economist for the Credit Union National Association, says investors have lost confidence in the subprime loans available to borrowers with weaker credit because so many were issued with poor underwriting standards.

He says credit unions typically sell only 25% to 30% of their loans, and hold the rest. As a result, they are very concerned about ensuring that the borrower can repay the loan down the road. Despite distress elsewhere, first-mortgage delinquencies at credit unions are 0.33% and net charge-offs are 0.02%.

Lending institutions are fighting to win business from consumers with good credit, many of which may be hesitant to buy, refinance or move up in the current housing market.

"It's a very competitive marketplace," says Terry Francisco, a spokesman for Bank of America Corp. in Charlotte, N.C. "We watch our competition closely."

One of the reasons banks want to make conventional loans is that consumers often end up with several products from the lender, including savings accounts, credit cards and checking accounts.

"We find that someone who has a mortgage with us will have about five products in addition to the mortgage," says Mr. Francisco.

Bank of America and other lending institutions are trying to entice borrowers by offering special deals.

For example, Bank of America's "No Fee Mortgage Plus" saves consumers about $3,000 in closing costs, which the bank covers. The interest rate varies among states and customers.

The current demand for home buyers with good credit makes it even more important for potential borrowers to shop around for the best deals. Individuals should check with their local credit union and bank, especially if they have existing accounts with those institutions.

A person's credit score is based on a number of factors, including their payment history, utilization of available credit and mix of debt. The range is from 300 to 850. Anything over 720 is very good and more than 750 is excellent.

Lenders consider not only borrowers' credit score and down payment, but also their debt level when making an assessment. The general standard is a debt-to-income ratio of 28/36. That means a household's monthly mortgage payment shouldn't exceed 28% of its monthly pretax income.

Total debt payments, including credit cards, student loans and car payments, shouldn't exceed 36% of the household's pretax income.

Victoria Maldonado has benefited from the current market. She and her fiancé had a good credit score and 20% down payment when they started shopping for a conventional mortgage.

They selected Bank of America because it paid their closing costs. Two weeks later, they closed on their Houston home.

"We had good credit, but what [the bank] offered was awesome," she says.