According to Marketwatch today, many lenders can’t sell their loans on to other investors:
After mortgage lenders like Indymac offer loans, they often package them for sale to institutional investors as mortgage-backed securities. If the loans conform to the standards of government-sponsored enterprises such as Fannie Mae those organizations can buy them. If the loans don’t conform, they are sold in the private, secondary market to other investors such as hedge funds and insurers.
The private, secondary mortgage market "is not functioning," Perry wrote in an email to Indymac staff, which was posted on a website run by the company on Thursday.
It’s currently difficult to trade even AAA rated parts of private mortgage-backed securities. Only mortgages that conform to the standards of government sponsored enterprises (GSEs) like Fannie are currently trading, Perry added.
So what are the guidelines for a "conforming" mortgage? For one thing, there is a limit on the loan amount:
The maximum loan amount is 50 percent higher in Alaska, Guam, Hawaii, and the Virgin Islands. Properties with five or more units are considered commercial properties and are handled under different rules.
Then there are other basic guidelines as well:
In general, a conforming loan qualified borrower should match these following three basic guidelines.
1. The conforming borrower must have at least three to five percent down for a down payment. The funds for the down payment should be from his/her own funds. In some cases gift funds can be allowed from a third party IF the amount of the gift is at least twenty percent of the purchase price. Closing costs can usually be covered by the seller. Depending on the program this percentage can be three to six percent. If reserves are required, they generally must be of the borrowers own funds.
2. The conforming borrower must have decent credit. Notice we didn’t say "excellent" credit. While borrowers with severely damaged credit usually do not qualify, borrowers with minor issues can often qualify with compensating factors (higher down payment, low debt to income ratios, etc.
3. The conforming borrower must meet standard qualifying debt to income ratios. For owner occupied, single family properties, and for second home and investor loans, the PITI (principle, interest, taxes, insurance) should usually not exceed twenty eight percent on the front end (PITI to monthly income) and thirty six percent on the back end (PITI plus long term monthly debt as credit cards, car loan, student loan, etc. to monthly income). The 28/36 guideline is just that a guideline, however in some cases these ratios can be slightly exceeded if there are compensating factors such as excellent credit, higher down payment, etc.
So what happens if you don’t fall within those limits?
"If home buyers are in loans that don’t conform with Fannie or Freddie, given present market circumstances, they will have to pay at least 100 basis points more." (A basis point is one hundredth of a percentage point).That will have a big impact on the housing market in California, Florida and other places where home prices are very high, he said."In these areas, if home buyers don’t have much money as a down payment, their loans will be too large to conform with Fannie and Freddie’s standards," Chow explained. "That means people will pay much higher interest rates."Indymac’s Perry said many major mortgage originators announced "significant, additional" interest rate increases this week.
