Standards Tighten in Secondary Mortgage Market

Mortgage brokers and lenders insist that despite endless repetition in the media about the economy, reports that credit markets are “frozen” are untrue.

“There is plenty of money out there,” said Kathryn Sims, senior vice president of First Security Bank of Searcy. “We keep hearing funds are tight. That’s not correct. There’s plenty of money for good borrowers.”

Sims has been at First Security for 46 years and has worked through every post-World War II economic downturn. She said this particular financial “crisis” stands apart precisely because banks didn’t stop lending.

Referring to interest rates in the late 1970s and early 1980s that peak around 20 percent in 1981, Sims said lending was “completely shut off” for a while.

“We have not shut off lending,” she said. “There have just been constant changes in the market from our investors and coming from Washington.”

In the secondary market, investors are still buying home mortgages to package into securities, but underwriting and appraisal standards are now much tighter.

Sims said FHA and conventional mortgage guidelines change “constantly” and occasionally lenders will get updates on new rules several times during a single day.

For people on the edge of qualifying, Sims said her loan officers often warn applicants of the shifting playing field.

“Under the guidelines in place now, they could qualify,” Sims said. “But we can’t tell them in 30 days they will qualify. That’s how quickly things are changing, especially in the lower credit score ratings.”

Sims said while rules are ever-changing, underwriting standards have returned to more traditional rules in place before the boom in subprime lending that spurred the burst of the housing bubble.

“It’s not so much different than what it should have been,” she said.

The most dramatic shifts in standards have come in appraisals, according to Sims and mortgage broker Tim McClung of Jetstream Lending in Bentonville.

McClung said secondary market investors are demanding more and more comparable sales than the traditional three of the past.

He described a recent experience when an appraiser he’s used the most provided an appraisal with six comparable sales and the investor demanded two more.

The appraiser provided two additional pending sale comps, but the investor came back wanting historical sales instead.

McClung said by June, lenders and brokers who deal with secondary market investors will have to submit appraisal requests to a third-party vendor who will select an appraiser.

McClung said such a system will be a “huge disadvantage.”

“For 20 years I’ve been doing good business and I know what appraiser can give me the best opinion,” he said. “Some are more knowledgeable in Shadow Valley than in Pea Ridge. Now I have no say in who provides that information to me.”

Even still, McClung said his business has been “incredible” so far this year and he currently has around $3 million in his pipeline.

“We’re seeing amazing prices and values on homes from a buyer standpoint,” he said. “It’s a wonderful time to buy a home in Northwest Arkansas.”

One product Jetstream and McClung have grown adept at is the rural development loan, for which even residents within Bentonville city limits can qualify.

It is one of the last 100 percent financing options available for individuals and families below certain income levels, McClung’s current rate was at 5 percent and the minimum credit score is 620.

The federal paperwork that comes with processing rural development loans requires plenty of hoop-jumping and deters many lenders and brokers from even offering them, but McClung said Jetstream has gotten the process down to around 30 days.