Home loan financing back to the days of common sense

Karey Gauthier of Novato was bowled over by the demands of a lengthy home loan process, but felt more secure in the end.

"It's more stringent, but that actually makes it a more straight-forward process," said Gauthier, 27, who with her husband, Nick, are in escrow on a ranch-style Novato home after a four-year search. Limited by a down payment of 5 percent, the couple assembled a thick pile of financial statements for a loan backed by the Federal Housing Administration for their $530,000 purchase. Years earlier they were among those considering risky loans offering lots of cash for ljavascript:void(0)ittle in return, a pattern that set back the mortgage industry and helped spawn a global economic crisis.

Now, at a time bankers are extra cautious and credit is tight, prospective homebuyers are struggling to compile mountains of paperwork and healthy down payments - and they still have to come up with sky-high credit scores to be considered for a deal.

"Because all the banks are more cautious, I feel as a buyer more protected now than I would have then," said Gauthier, a credential analyst for Dominican University in San Rafael. "They're shining light in all the dark corners, where before they weren't."

The Gauthiers' mortgage consultant, Sean Murphy of RPM Mortgage in Mill Valley, recalled an industry of "real quick, loose deals" when he entered the business with the now-shuttered GreenPoint Mortgage in Novato in 2004. Murphy said when financial markets imploded
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in the summer of 2007, mortgage assets were bundled in such intertwined fashion that industry professionals couldn't tell which were performing and which were defaulting.

"Lenders (today) are reverting back to 1980s lending standards which essentially is common sense, fully documented underwriting" of loans, Murphy said. "It's a full documentation environment of your income, your assets and your employment."

Last week, Federal Reserve Chairman Ben Bernanke addressed the need for government regulation to protect consumers. The central bank had approved new regulations aimed at curbing abuses on home mortgages. They bar lenders from making loans without proof of a borrower's income and would require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.

Murphy said the past two years have been an education not just for him, but prospective clients expecting piecemeal filings of the past to still exist.

Assembling reams of bank statements, income tax and other Internal Revenue Service forms are now the norm, Murphy said, not just summaries "and the reality is these loans get audited for consistency (and) clarity. They want everything."

Sara Zander, a loan agent in Rohnert Park, said a Marin husband and wife with excellent credit had to re-sign every escrow document twice before closing on a home sale last month because of lender concerns - that included standardizing ink color of handwritten wording.

Stevens Manning, president of Manning Mortgage Associates of San Rafael and spokesman for the local chapter of the California Mortgage Brokers Association, said hallmarks of a AAA-rated candidate include more than two years of pay stubs, a credit score of 740 - up from 680 in past years - and down payment of at least 20 percent.

Down-payments of less than 10 percent are considered high risk, though Manning said FHA loans, such as what the Gauthiers sought, allowed an amount as low as 3.5 percent along with other limitations.

Marin mortgages for more than $417,000 were used to finance 42 percent of all home sales in March, compared with close to 80 percent before the credit crunch hit in 2007, according to MDA DataQuick, a real estate tracking firm in San Diego.

In the Bay Area, similar mortgages represented 19 percent of all home sales last month, down from more than 60 percent prior to the credit crunch.

Just over 5 percent of Marin home loans in March were government-insured FHA loans, a figure that jumped up to highs of 8 and 10 percent toward the end of 2008 and was non-existent one year earlier.

FHA loans made up one quarter of all Bay Area loans last month, up from 1.5 percent a year ago.

Manning said many brokers have returned to long checklists that had been set aside, and a focus on what he calls the five C's: cash flow, capital, character, collateral and credit (score).

He said the 2,500 members of his statewide association is half what it was two years ago as firms shut down and players exited the industry.

While admitting "there are some bad actors in the mortgage business," Manning pointed to Wall Street "dropping the barriers of entry" for people who shouldn't have been given loans.

"Underwriters that made the decisions basically sullied personnel (and) were the ones saying this looks like a good loan," he said. "The job of the loan broker is to present the best case for their client."

Brokers agreed that non-conventional loans with little documentation and easy qualifying could still be found, but at a premium price.

For other buyers in Marin's high-cost market, government assistance in the form of a federal loan limit increase from $625,500 to $729,00, more FHA assistance and expanded programs offered by mortgage giant Fannie Mae are beginning to trickle into the county. As part of the recent stimulus package, buyers who haven't had a mortgage on their credit report within three years can take advantage of an $8,000 tax credit.

Those who hope to take advantage will need patience, perseverance and advance planning.

Loan agent Zander said "the days of going out and looking at houses and then looking for a mortgage broker and getting preapproved in minutes, that's gone."

Example of checklist items used by mortgage brokers to process a home loan:

- Completed loan application

- Good-faith estimate and closing costs

- Current pay stubs showing one full month of wages

- W-2 form for all employed borrowers

- 1040 federal tax return signed by borrowers with all schedules for multiple years

- 1099 forms showing all gross income

- Year-to-date profit and loss statement and current balance sheet prepared by accountant and signed by borrower

- Property purchase contract

- Copy of drivers license or resident alien card

- Estimated closing statement on home being sold or final closing statement if already sold

- Bank statements for last three months

- Stock/bond statements for last three months

- IRA, Keogh, pension statements for last three months

- Schedule of real estate owned (if own more than three properties)

- Rental or lease agreements for all rental income properties

- Any divorce or separation paperwork

- Copy of first mortgage note (if applying for second mortgage or equity line)

- Contact information for landlord

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