Good News From Lenders

For the first few months of 2008 the best news in real estate has concerned mortgages. With interest levels bobbing around 6 percent for 30-year fixed-rate loans, those who want to buy or refinance at this time will find interest rates not terribly far-removed from the historic lows seen in 2003.

The mortgage rates seen today are important because what they say is the lender confidence in the U.S. real estate marketplace remains strong. Despite massive numbers of foreclosures -- and more to come -- lenders are nevertheless willing to extend credit to U.S. homeowners.

The catch is that loans terms have changed. This is neither bad nor unexpected, but it does mean that to get 6-percent financing borrower's will have to take steps that would have been unnecessary 12 months ago.

For instance, stated-income mortgage applications -- those so-called "liar loans" where borrowers estimated income and lenders politely didn't check -- are a vanishing species. Such applications make lenders nervous and are a sure path to higher rates. Why stated-income loan applications did not make lenders nervous before is one of the great financial mysteries of our time.

Down payments are back. The old days of buying with little or nothing down are largely gone. For instance, earlier this year the big mortgage insurer, PMI Group, announced that it would no longer back loans with less than 3 percent up-front.

Last Friday, Fannie Mae announced that it would adopt a stance similar to PMI -- 3 percent down if the loan is underwritten with Fannie Mae's automated system but no less than 5 percent down if the underwriting was done with someone else's computer program.

The new "Single National Down Payment Policy" replaces a tougher policy announced by Fannie Mae late last year. At that time Fannie Mae said it would increase down payment requirements by 5 percent in so-called "declining" markets, areas where home prices were expected to fall further.

The "declining" markets policy, which will likely now end for the remaining companies that use such a standard, had problems from day one. Why?

First, the policy looked at broad areas which may not have reflected pricing trends within individual communities and neighborhoods.

Second, by tagging large areas as "declining" the policy raised down payment requirements for huge numbers of homes -- thus creating slower markets and weaker prices.

So yes, 6 percent financing is out there and lenders want your business. But the rules have changed, so be prepared for more paperwork, steeper down payment requirements when you buy and the need for more equity when you refinance.