If real estate finance is the art of the possible, what's possible right now for homebuyers and sellers worried about rising mortgage rates, Wall Street bond market jitters and soft home prices?
Plenty. Although certain aspects of today's postboom marketplace might look scary on any given day, most of the traditional problem-solving tools of real estate finance are still at your disposal, whether you're a buyer or a seller.
Interest rates of 6 3/4 percent and higher needn't be deal breakers or impediments to selling or buying. Just talk to experienced, veteran mortgage or real estate professionals who worked through periods of double-digit and high single-digit interest rates and negative prices in the 1980s and early 1990s and you'll get some valuable perspective.
"It's really back to the future," said Paul E. Skeens, owner of Carteret Mortgage Corp.'s branch in Waldorf. "We're headed back to a more normal cycle [after the feeding frenzies of the boom years]. The crazy stuff may be gone, but the old solutions still work great."
For example, for homebuyers with limited cash on hand and borderline credit who formerly might have signed up for a zero-down subprime mortgage two years ago, Skeens recommends a program available nationwide through mortgage investor Freddie Mac. It's called "Home Possible," and comes in several variations including the zero-down-payment "Home Possible 100." The program allows seller contributions up to 3 percent of the total costs and does not require any set amount of financial reserves by borrowers. The maximum loan amount is $417,000, according to Freddie's Web site.
The "back-to-the-future" aspect is that, unlike the razzle-dazzle, stated-income underwriting at the height of the housing boom, Freddie Mac requires applicants to qualify through its traditional "Loan Prospector" automated underwriting system. This means that borrowers generally need FICO credit scores of 620 or higher and must be prepared to verify income and employment.
For applicants with nontraditional credit histories causing them to have artificially depressed credit scores, Freddie Mac will accept old-fashioned "manual" underwriting, as well as look at nontraditional credit records such as rent payment histories and utility payments - a key feature for young, first-time buyers with slim credit files, as well as minorities and immigrants with little banking experience.
Skeens also is bullish on the oldest mortgage program around - FHA loans backed by the Federal Housing Administration - especially for refinancings out of less consumer-friendly mortgages. Once Congress passes pending legislation allowing zero down payments and 40-year terms, "we'll be doing a lot more FHA loans for home purchasers," he said. FHA loans currently require 3 percent down payments, as well as employment, income and asset verifications. Unlike subprime loans, they come with lower rates and no prepayment penalties.
Back-to-the-future sellers and buyers should also be looking closely at still another time-tested technique - rate buydowns. James Svinth, chief operating officer of LendingTree Loans in Irvine, Calif., says his firm is seeing a rise in transactions where sellers subsidize the rate on their buyers' mortgages for the first two to three years in exchange for an upfront payment by the seller to the lender.
The underlying mortgage can take almost any form - fixed-rate, adjustable, interest-only or a hybrid - but the net result is the same: The loan rate is reduced to a more affordable level for a period of years as a concession to the buyer.
Svinth says that heads-up sellers - and their realty agents - should consider advertising the availability of buydowns to bring in purchasers. "It's a very effective tool, and just about any lender can arrange it."
Still another back-to-the-future concept for today's market: Seller "takebacks" or "carrybacks." A mainstay of the creative financing toolbox during the hyperinflationary periods of the 1980s - when conventional mortgages for buyers with good credit topped out over 15 percent - seller takebacks are simply deferred-payment notes offered by sellers on attractive terms to help buyers swing the deal.
Properly structured and documented by experienced attorneys or investors, takeback notes are readily saleable for cash in the private secondary note marketplace. Sellers can also hold on to them as win-win investments, pocketing steady income. A sign that this form of private financing may be poised for a big expansion was the recent acquisition of CircleLending LLC, a privately held Waltham, Mass.-based company specializing in intra-family and seller takeback financing by billionaire Richard Branson's Virgin Group PLC.
Sir Richard is not known for drilling dry holes, so maybe it's back to the future indeed, but on a much larger scale.