1/3 of Purchase Loans Originated by Mortgage Brokers Failed to Close Last Month - National Realty News

1/3 of Purchase Loans Originated by Mortgage Brokers Failed to Close Last Month Says Survey

Thursday, September 13, 2007 - By Staff Writer, The National Realty News

WASHINGTON, DC – About 33% of home purchase closings of loans originated by mortgage brokers were canceled during August, according to a new national survey, which also found that 57% of brokers’ customers could not refinance adjustable rate mortgages (ARMs) that had resetting interest rates.

The survey of 1,744 brokers, conducted August 23-31, provides one of the first quantitative measures of the major disruptions in the mortgage originations market which started in early August. The survey was conducted by Campbell Communications of Washington.

The survey found that home purchase closings were more often canceled for homebuyers with subprime credit. Fifty-six percent of subprime homebuyers in August had canceled closings while 21% of homebuyers seeking prime conforming mortgages had canceled closings. In another survey of real estate agents taken by Campbell Communications back in 2004, respondents indicated that only 4% of home purchase closings failed in that timeframe for mortgage-related reasons.

Thomas Popik, designer of the survey, noted that the reasons for canceled closings were different depending on credit class and product category. Prime conforming homebuyers were more likely to withdraw from the transaction while subprime homebuyers were more likely to have problems getting mortgage approval, he said.

“The survey found that both prime and subprime homeowners are having trouble refinancing adjustable rate mortgages,” Popik said. “Sixty-four percent of subprime homeowners could not refinance while 50% of homeowners seeking prime conforming mortgages could not refinance. Subprime homeowners most commonly had issues with subprime loan programs no longer being offered and FICO scores. Those seeking prime conforming mortgages most commonly found appraised property values and loan-to-value (LTV) ratios as impediments.”

Other product categories covered in the survey were Alt A loans and prime jumbo loans. Alt A loans have lower documentation requirements for borrower income and assets. Jumbo loans have a loan amount greater than the Fannie Mae and Freddie Mac conforming limit of $417,000. Throughout the tabulated survey results, prime conforming, prime jumbo, Alt A, and subprime product categories are separately presented.

Mortgage broker survey respondents indicated that the maximum acceptable LTV for prime jumbo production has tightened substantially and now averages 90%, the lowest of any of the four product categories surveyed. For prime jumbo loans, the minimum acceptable FICO score now averages 679, the highest of the four product categories surveyed.

The survey found substantially reduced mortgage broker production in the month of August 2007 as compared to August of last year. Production of prime conforming loans was down approximately 20% while production of Alt A loans was down nearly 50%.

Survey results indicated that a substantial number of commitments by lenders to fund loans are not being met. Another common term for funding commitment is “fully-approved loan.” Twenty percent of commitments to fund subprime loans through mortgage brokers were not met during the month of August.

The survey asked mortgage brokers for their most frequently used lenders for prime conforming, prime jumbo, Alt A, and subprime production during the month of August. Survey respondents indicated that one-third of their most frequently used subprime lenders in August are no longer accepting applications or funding loans. For prime jumbo lenders, approximately 15% are no longer accepting applications or funding loans.

The survey also asked mortgage brokers to specify the lenders they are most likely to use going forward. For prime conforming production, Countrywide was most often selected as the most likely lender going forward. For subprime production, First Franklin, a unit of Merrill Lynch, was most often selected.

The survey found that mortgage brokers are submitting identical applications for the same borrower to multiple lenders. Reasons for submitting multiple identical applications include rate shopping, uncertainty regarding mortgage approval, uncertainty regarding prevailing underwriting guidelines, and concern that lenders will not honor funding commitments. While mortgage brokers more often submit multiple applications for subprime and Alt A borrowers, this practice has become more prevalent for prime credit applicants as well. On average, mortgage brokers are currently submitting 1.7 applications for prime conforming loans; another Campbell Communications survey of mortgage brokers in 2006 found only 1.2 applications submitted on average for prime conforming loans.

“There is very little hard data available about what is currently going on in the mortgage originations and home sales markets,” Popik noted. “The Mortgage Bankers Association weekly application index is likely being skewed by mortgage brokers submitting multiple applications.

The National Association of Realtors Pending Home Sales Index does not account for sales that will fall through because of mortgage issues. Our survey shows that the number of home purchase transactions falling through due to the mortgage market disruption was substantial for the month of August. Mortgage originations statistics for the month of August from government registries of deed and industry surveys will not become available for another 60-90 days. To the best of my knowledge, we have the most current and actionable data available on the wholesale mortgage market and on homebuyers served by mortgage brokers.”