MORTGAGE$: Industry will broaden availability of Expanded Approval loans

By William Kugel

For several months, the mortgage industry has been adjusting to the sub-prime credit "meltdown" that has had the effect of tightening guidelines for borrowers with beleaguered credit or in need of stated income or "no doc" loans. In the wake of extraordinary default rates for these specialty mortgage products, a number of reactions and new steps have emerged to counter the economic consequences of these recent trends. In this article, I will provide an update on how the industry is reacting as well as share Fannie Mae's recent announcement to broaden the availability of its Expanded Approval mortgages.The Mortgage Bankers Association has recently published a "Statement on Responsible Lending" that was jointly composed by six of the top trade associations in the mortgage industry. They state, "Our trade associations believe that all mortgage lenders should embrace responsible sub-prime lending principles. We support the efforts by industry and the federal banking regulatory agencies to strengthen underwriting standards and to protect borrowers against unfair and deceptive mortgage lending practices. Efforts to strengthen sub-prime lending standards and assist current customers are under way." The statement focuses on three key areas: Lenders should only make home loans to consumers with sub-prime credit whom they reasonably believe have the ability to repay the loans based on information available at the time the loan is made. Loan terms, features, benefits and risks should be clearly disclosed to customers in ways that enable them to make an educated decision about the loan product they choose. Regulators, loan servicers and investors should work together to make available to homeowners appropriate options to help them sustain homeownership. Other steps occurring to address this segment of the mortgage market include hearings taking place with the Federal Reserve. The Federal Reserve Board on Tuesday announced the discussion topics for its June 14 public hearing under the Home Ownership and Equity Protection Act (HOEPA). According to the Fed, "The purpose of the hearing is to gather information about how the board might use its rule-making authority to curb abusive lending practices in the home mortgage market, including the sub-prime sector, in a way that preserves incentives for responsible lenders to provide credit to borrowers. Hearing participants will discuss whether the board should use its rule-making authority to address concerns about certain terms and practices related to home mortgage loans, including: 1) Prepayment penalties; 2) Escrow accounts for taxes and insurance on sub-prime loans; 3) "Stated income" or "low doc" loans; and 4) Consideration of a borrower's ability to repay a loan. Participants will also discuss the effectiveness of state laws that have prohibited or restricted these and other terms or practices, and whether the board should consider adopting similar regulations to curb abusive lending practices."A reasonable question for consumers to ask is, "What will this mean to me?" While I do not presume to know the future, the past has taught me that in the aftermath of high foreclosure and default rates follows a period of tightened credit guidelines, tougher underwriting, and increased costs for higher risk loans and those loans with special features (such as stated income products).On the bright side, I point to Fannie Mae's most recent announcement on the "Broad Availability of Expanded Approval" loans. What this means is that while some sub-prime lenders (and products) have recently left the marketplace, Fannie Mae (which is among the largest providers of home mortgages in the world) is countering with an increased availability of mortgage products that will address borrowers with less than perfect credit. According to Fannie Mae, "We are updating the Selling and Servicing Guide with the following changes to: expand the availability of Expanded Approval (EA); add a new 40-year amortization option to EA; andExpand Single-Premium Mortgage Insurance to 100 percent LTV.According to Fannie Mae, "As a mortgage option that gives borrowers with blemished credit access to high-quality, low-cost, non-predatory loans, Expanded Approval provides different levels of approval recommendations for loans submitted to Desktop Underwriter. Currently, EA is only available to lenders that have been specifically approved to deliver and service mortgage loans that receive an EA recommendation, both with and without the Timely Payment Rewards (TPR) feature.These new Expanded Approval series of loan programs offer improved terms over the sub-prime loans that have been previously available. Expanded Approval loans contain no prepayment penalties and are offered at interest rates and fees that are more moderate and commensurate with the risks and creditworthiness of the individual. Expanded Approval loans are available as standard 30-year and 15-year fixed rate conventional loans as well as the increasingly popular 5/1 and 7/1 adjustable rate mortgages.One more advantage of the Expanded Approval programs is a feature found in programs EA-II and EA-III known as the Timely Payment Rewards option (TPR for short). The TPR option provides for an automatic rollback of the interest rate after 24-months of on-time payments. The TPR option is written right into the promissory note and the mortgage itself. On a 30-year mortgage, the remaining 28 years will be priced with the interest rate relief built right into the note. It means that these customers will not have to go through the effort and costs of a refinance to improve their position after they have rebuilt their credit.Another advantage of the EA loans is that you avoid withdrawing and re-submitting your loan request. The application for an Expanded Approval loan is done automatically when your loan is handled through a participating lender who utilizes the latest technology with automated underwriting. The process works like this: your loan officer will enter the application for you into automated underwriting software that is compatible with standard conventional conforming loan sources such as Fannie Mae. Once the application is complete it is uploaded to the automated underwriting engines of these lenders. If an applicant fails to get approved for a standard conventional A paper loan, instead of being declined, the same application is re-run to see if it can be approved in one of the three levels of the Expanded Approval criteria. The result is that thousands of applicants who used to be declined and whose only next option was to re-apply with a sub-prime or hard money lender are now being approved with only a moderate increase in rate and fees. This announcement should be seen as a positive development for the real estate and finance industry. While the mood in the markets recently has turned to caution, this new information tells buyers and homeowners with less than perfect credit that they may be equally able to secure homeownership than before. In the fact, the options may even be better! The best way to find out is to visit an experienced professional with access to the Expanded Approval programs and get pre-approved. The column MORTGAGE$ has been in continuous publication for 17 years. William Kugel is a senior loan officer with GMAC Mortgage Corp., and a Mount Washington Valley resident. You may contact him at 888-777-5099, write him c/o The Conway Daily Sun, visit the Web site www.gmacm.net/william_kugel or send email to william_kugel@gmacm.com.All Rights Reserved. Copyright 2007, W. H. Kugel.