Mortgage Fallout: Mortgage options that have disappeared

The United States is currently experiencing a liquidity crunch. This means that lenders are being stricter with lending guidelines and less anxious to lend money. For mortgages this means that some mortgages that were options in the past are no longer available.

These loans typically all meant higher risk for the lender. With lenders feeling skittish in this economic environment these loans are extremely hard to find if you can find them at all.

Sub-prime loans

These are notoriously famous right now, with the mortgage crisis frequently being referred to as the Sub-prime meltdown. A sub-prime mortgage was one provided to borrowers with poor credit and/or little to no down payment.

These are mortgages that probably should never have been done but were approved anyway using less favorable terms. The likelihood of a default is greatest with this type of mortgage.

With credit so hard to obtain and the lack of liquidity in the financial markets almost no lender is willing to do these mortgages anymore. If you are in a position in which you have poor credit there are programs out there to help you, don’t abandon your dream of owning a home, but know that without these loans it will be more difficult to secure financing.

Alt-A

These are mortgages that were done during the housing boom that had very lax underwriting. These were mortgages for people with hard-to-verify income and information.

These loans went by many different names, such as Stated Income Stated Asset loans and Stated Income Verified Asset loans. The names revealed just what they were, income that could not be verified, sometimes assets with values that also could not be verified.

The common thread with this type of loan is that the borrower provided certain favorable information on the application and the underwriter could not verify the information for accuracy. The result, of course, was abuse of the program.

People could easily misrepresent information on the application. Many people received loans in this way that they should never have been able to receive. In the current market environment underwriters are being very particular about having all the information up front and verified before extending credit. This type of mortgage simply no longer exists.

Option ARM’s

An option ARM is an Adjustable Rate Mortgage that allows the borrower tremendous flexibility by giving them the option to pay much lower than a typical monthly payment. These were commonly misrepresented by loan officers and sold as ultra-low rate mortgages.

The result was negative amortization, giving these mortgages the nickname of “neg am” loans. What would happen is that the borrower would receive a statement that indicated that the optional minimum payment would be a specific amount, much lower than a regular mortgage payment. If the borrower chose to make that minimum payment the remaining interest would be added to the loan’s principal.

The result was that month after month the principal balance would grow and the borrower would owe more and more. Unfortunately there were some people that did not realize this was happening as they made that low minimum payment.

When home values were increasing, a growing principal balance was hardly an issue, the home’s value would remain sufficient to shoulder the loan. As home values have fallen these loans have put homeowners in a position where they owe much more than the home is worth.

Lenders will not put themselves into this position right now, fearful that a borrower in that situation would just walk away from the home, leaving the lender to take the loss.

With the credit crisis that the nation is facing, some of these mortgage options that were on the table just a few years back have disappeared. This is almost always because lenders have become unwilling to take on higher risks when the credit markets are so tight.

Some options that might have been ideal for you, if you have poor credit or hard-to-verify income, are no longer available. But just because these options have gone doesn’t mean to give up your dream of home ownership. Don’t give up! Everybody needs a place to live, and there are still programs out there to help you.

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