For the residential mortgage business, 2007 was a difficult year, with changing underwriting guidelines and many lenders either scaling back their products or going out of business. Now the storm is settling down, some positives are emerging that will stabilize the market and help many qualified homebuyers purchase the home they want.

What Happened Last Year?

In the second quarter the mortgage industry realized that the subprime market was headed for big trouble. These subprime loans were provided to people with spotty credit and often required no income verification or down payment. These loans were usually two-year Adjustable Rate Mortgages (ARM) which reset to rates much higher than fixed rates. Once property values began to level off and in many areas actually depreciate, these loans began to perform very poorly.

This subprime meltdown caused a ‘ripple effect’ within the industry, resulting in many changes. Major mortgage lenders and Wall Street companies stopped their mortgage offerings on less traditional mortgage products such as jumbo loans. The media coverage of the subprime implosion and the hedge losses incurred by banks and other financial institutions led to deterioration of consumer confidence, followed by a slowdown in the economy and poor job growth.

The Good News

The Federal Reserve has stepped in, lowering their lending rates (and prime) by 2.25 percent. This has helped lower short and long-term mortgage rates. In fact, fixed rates have only been this low one other time in the last 30 years! These rates have begun to strengthen activity in the real estate marketplace and have caused an increase in refinance activity.

While many of the ‘exotic’ mortgage products introduced over the past five years are gone, the traditional mortgage market has not changed much, with 100 percent loans still available for those with good credit and verifiable income. Traditional ARM plans (5, 7 and 10 year) are at near historical lows and are a very good alternative to fixed rates, despite the media attack on ARM mortgages. Most mortgages are held less than five years, so a seven-year ARM can be a good fit for many borrowers.

What Have We Learned?

It is more important than ever to choose a lender with a lot of experience and a good reputation. This recent market has proven that if a mortgage deal sounds “to good to be true” it probably is. Some lenders hide certain costs, resulting in inaccurate cost quotes and angry customers. When shopping a mortgage, ask more questions than just rates and closing costs, and ask for referrals from trusted friends. This should help to ensure a competitively priced mortgage and a smoother transaction. Reputation is key.

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