Real estate market

Many borrowers who normally qualify for conforming programs, opt for the higher loan-to-value (LTV) ratio limits of non-conforming loans. Higher LTV ratios mean higher loan amount limits. First of all, note that conforming loans have the following restrictively low LTV ratio limits for most of their loan programs:
● Single-family purchase or No-cash-out refinance: 90%-95%
● Two-unit purchase or No-cash-out refinance: 90%
● Three- & four-unit purchase or No-cash-out refinance: 80%
● Investor (non-owner-occupied property) purchase or No-cash-out refinance: 70%
● Cash-out refinance (owner-occupied property): 75%
● Cash-out refinance (investor: Non-owner-occupied property): 65%
If a property owner or investor wishes to purchase a property with lower down payment or refinance with a higher loan-to-value ratio, then a non-conforming loan program becomes the only option.
Perhaps the best programs that non-conforming lenders offer are zero or no down payment loans, which allow the purchase of both owner-occupied and investment properties with nothing down.

Seriously damaged credit is normally unacceptable for conforming programs, although occasional exceptions are allowed. Conforming loans must have grade-A credit, although A- minus credit is acceptable when compensating factors are present.
For all other applicants, non-conforming loan programs are available with a variety of alternative financing opportunities. It is even possible to provide refinance a home from foreclosure, as well as providing motgage financing for borrowers with recent bankruptcies. Damaged credit borrowers face even higher interest rates than other non-conforming programs. Remember, however, that you should always view high interest rates as short-term. As your credit grade improves, you will be able to refinance to lower rates and better terms.

A jumbo loan is any loan that exceeds conforming guidelines. Since Fannie Mae and Freddie Mac’s charter are focused on servicing America’s low, moderate and middle income home buyers, loan amount limits filter high-income borrowers. FHA loans institute even lower loan amount limits than does Fannie Mae and Freddie Mac. As of January 2000, the maximum loan amount limits for conforming loan programs are as follows:
● Single-unit home or condominium unit: $240,000
● Two-unit residential properties: $207,000
● Three-unit residential properties: $371,200
● Four-unit residential properties: $461,350
Both Fannie Mae and Freddie Mac adjust their conforming limits—usually in cooperation with each other—to reflect increases in average home prices and mortgage loan amounts. These are the conforming (Fannie Mae and Freddie Mac) conventional loan limits.

The second mortgage market has been an increasingly active industry during the past two decades, especially as homeowners discover their uses and cost-effectiveness. Fannie Mae and Freddie Mac normally do not purchase home equity loans and home equity lines of credit. In fact, credit lines are usually either portfolio, with the originating lender keeping the loan and servicing rights.

Whereas there may be dozens of conforming loan programs available at any given time, there are probably thousands of different non-conforming programs. Non-conforming lenders design loans for specific conforming guideline restrictions–or rather for the borrowers and situations that fail to meet those conforming restrictions. Most non-conforming programs tend to fall within the following six categories:
● Second mortgages
● Jumbo loan amounts
● Damaged credit
● Loan-to-Value (LTV) ratios
● Income qualification
● Asset verification
In addition or related to the above, a number of non-conforming scenarios also steer many borrowers toward non-conforming programs. Wherever the conforming loan proves too restrictive, chances are that a non-conforming loan exists to serve that niche market.

The American free market economy is vibrant, dynamic and always looking for additional, more profitable business opportunities. The non-conforming is one such market for financial investors and lenders. Fannie Mae, Freddie Mac and Ginnie Mae only serve A-credit borrowers, who meet those agencies’ strict guidelines regarding income, employment, assets, property, etc. For a long period, this situation ignored a huge market of people falling outside these “conforming” guidelines.
When financial investors and lenders realized the opportunities available in the non-conforming market, they followed Fannie Mae’s lead and created mortgage-backed securities for this underserved market. Today, the non-conforming market is one of the fastest growing segments of the mortgage industry.
The non-conforming market essentially serves those borrowers who are unable to qualify for conforming loans. These borrowers are considered higher risk, but many investors still see these loans as great investments. The higher risk levels are offset by the higher interest and the fact that the loan is secured by real estate property—if the borrower defaults, the property is foreclosed and sold to pay off the loan.
As mentioned, non-conforming loans are sold to the secondary market in much the same way as conforming loans are sold through Fannie Mae and Freddie Mac.
Private financial institutions purchase from lenders across the nation those non-conforming loans that meet the specific institution’s guidelines. That private company then packages multi-million dollar blocks of loans into securities, which are then sold to investors on Wall Street and the financial markets.
Wall Street and the financial markets to which these securitized mortgages are sold is called the secondary mortgage market. By comparison, the primary mortgage market involves lenders and borrowers.
By connecting the residential mortgage market with the broader, more powerful financial market, home buyers receive an increased supply of loan funds. Without this connection into the secondary mortgage market, banks will have a more limited supply of mortgage funds. Again, this abundant supply means relatively lower pricing or interest rates.
Through this process, private financial corporations mimic federally chartered agencies, such as Fannie Mae, to reduce the lender’s risk exposure. If one borrower defaults, the losses are diffused among all the parties. For the Wall Street investors who buy such mortgage securities, they do not bet on a single loan; instead they invest in a piece of thousands of loans (used to create this block of mortgage securities).
Before the advent of the secondary mortgage market, bank loans basically were limited to the deposits that the banks had in their institution. Once those deposits were all loaned out, the bank could not really lend any more funds. In such scenarios, banks were especially hesitant to lend funds to high-risk borrowers.

Mortgage loans can normally be categorized according to three categories, depending on how they are handled by the lender after closing:
● Portfolio
● Conforming
● Non-conforming
A portfolio loan is kept by the lender in its “portfolio” rather than sold to the secondary mortgage market. Conforming loans, which normally have the best rates and terms are sold to the secondary mortgage market through agencies such as Fannie Mae (FNMA), Freddie Mac (FHLMC) or Ginnie Mae (GNMA); they are called conforming because for a loan to be sold to these agencies, they must satisfy or “conform” to the more stringent guidelines established by these government-chartered agencies. For more details, see the “Conforming Loan Programs” article.
A non-conforming loan is also sold to the secondary mortgage market; however, it is sold through private conduits because such loans do not conform to Fannie Mae, Freddie Mac or Ginnie Mae guidelines. This article provides an overview of the non-conforming industry and a review of the different types of non-conforming programs.

If the borrower in a refinance has at least two mortgages—both a first mortgage and a second mortgage—on the subject property, that borrower will have three refinancing options, which have different challenges:
● Consolidation. The borrower may choose to pay off both loans with a new refinance loan. This refinance loan in effect consolidates the primary and junior mortgage loans. If the second mortgage is at least one years old, then this would be considered a rate and term (non-cash-out) refinance and have higher loan-to-value (LTV) ratios.
● Refinance the second mortgage only. The borrower may choose to refinance only the junior mortgage and leave the primary mortgage as it is. The new loan will have to be a second mortgage loan.
● Refinance the first mortgage only. The borrower may elect to refinance only the primary mortgage and leave the junior mortgage as it is. However, this requires subordination of the existing second mortgage. [Remember that liens are recorded chronologically. The new first mortgage loan wants to have first lien. The lender on the second mortgage loan must agree in writing that the new first mortgage will assume priority lien over that existing second mortgage. The existing second mortgage “subordinates” itself to the new first mortgage.]