After the mortgage market collapsed in late 2008, the aftermath proved challenging for homeowners brave enough to seek new mortgages or attempt to complete mortgage refinances. Mortgage lenders, even after receiving hundreds of billions of dollars in taxpayer bailout money, made very few loans—even to people with stellar credit and proof of income.
Just over a year ago, borrower needed credit scores above 760 for new mortgages and almost 770 to refinance their mortgage.
Lenders easing credit for loans
At the beginning of the year, lenders begin lowering the underwriting standards for prime mortgages. These loans are made to borrowers with AAA credit. The loans have the least chance of default and carry the lowest interest rates. The Federal Reserve released data that shows the move by lenders spurred demand for prime loans by eligible borrowers.
It’s only in the last few months that lenders have begun to relax the draconian lending criteria put in place after the housing market crisis for borrowers with blemished credit profiles have found it easier to qualify for loans, according to the mortgage origination software firm Ellie Mae.
The firm reports that 52% of the loans approved in June 2013 had credit scores of 700 or higher compared to 71% for the same period in 2012. In addition, lenders are not requiring buyers to make bigger down payments.
Mortgage trap: Rising rates and more lending
Historically, when mortgage rates are on the increase, lenders have always tightened underwriting standards and made fewer loans--which have not been the case during this latest trend of rising interest rates. Consequently, borrowers need to be aware of a potential “trap.”
When banks are looking to increase business and profits, it lowers the underwriting criteria and makes it easier for borrowers to qualify. After the housing market went into a tailspin, policymakers introduced and passed a slew of new legislation, which was designed to improve oversight and protect consumers.
However, but the jury is still out on the effectiveness of these new regulations and the commitment of lenders to change their ways.” The fact is, when mortgages become easier to obtain, it coincides with bank management tendency to overlook questionable practices.
Consumer Financial Protection Bureau warning
A recent report by the Consumer Financial Protection Bureaus (CFPB) clearly illustrates this inclination. In the section of the expose labeled “Significant Violations Detected,” the CFPB wrote that 10,000 consumers and military service persons have been affected by breaches of mortgage standards.
The CFPB has even sent out reminders to mortgage servicers that they would not be able to avoid the consequences of these violations.
Consumer need to be vigilant of other practices that are not necessary in the category of being “unfair, deceptive, or abusive acts or practices,” but nonetheless, take advantage of unsuspecting borrowers.
For example, the infamous adjustable-rate mortgage (ARM) has made a comeback. Lenders are actively pushing ARMs as a way to save hundreds of dollars on your mortgage. The problem is that interest rates that have teetered at historic lows have only one place to go—up.
The monthly payments may be small now, but the lesson learned by consumers who were took on risky ARMs before the mortgage meltdown was that it was easy to get behind on their mortgage payment when the low introductory rate expired and lenders started exercising their right to increase interest rates.
Mortgage scam: Veterans targeted by mortgage swindlers
Many veterans are receiving direct mail offers for mortgage originations and refinancing—under the guise of being endorsed by the Department of Veterans Affairs., writes Cody Kessler of Kessler Lending Advisors.
One such scheme promised an elderly Veteran and his wife the opportunity for a “streamline refinance” of their VA loan through the Interest Rate Reduction Refinance Loan program (IRRRL). The IRRRL is a legitimated program insured by the VA.
Allegedly, the couple would receive a new 30-year, fixed-rate mortgage that would start at 4.75 percent –the market interest rate at the time was 3.25 percent and no points. The scammer promised the couple that the interest rate would fall each month to a low of 3 percent within six months after closing.
The couple was bilked for thousands of dollars in closing cost and never received the interest rate reduction.
Veterans and active duty personnel need to have a heavy dose of skepticism when it comes to offers that sound “too-good-to-be-true.” because they usually are nothing but dishonest solicitations designed to take advantage of you.