The sub-prime mortgage crisis is wreaking havoc on the normally predictable home lending market, with rates for even the most credit-worthy borrowers swinging wildly from one day -- and one lender -- to the next. Meanwhile, loan companies are dropping like flies, often leaving borrowers in the lurch.
The turmoil is forcing home buyers, and homeowners looking to refinance, to scramble for new strategies.
"It's the Wild West of lending out there," said Jeff Lazerson, president of Mortgage Grader, a Web-based mortgage shopping service. "In 21 years of lending, I've never seen it this bad. It's scary."
A few signs of the tumult: Loan rates, normally tied to the cost of a 10-year Treasury note, have become suddenly disconnected. Late last week, when rates for "conforming" loans -- those under $417,000 -- were dropping, the cost of larger, "jumbo," loans was soaring. And individual lenders were quoting rates all over the map.
For instance, Countrywide Financial Inc. was offering jumbo loans for 6.75% on Monday. Bank of America quoted a jumbo loan rate of 7.875% the same day, effectively pricing itself out of the California market, where 38% of loans are jumbos. By Tuesday morning, Lazerson said, BofA was offering a considerably lower rate, but Wells Fargo had hiked its rate.
Adding to the chaos, some large lenders -- HomeBanc, Luminent Mortgage Capital Inc. and Impac Mortgage Holdings Inc. -- said Tuesday they were short of cash and would halt or cut back on lending.
A day earlier, American Home Mortgage Investment Corp. filed for bankruptcy protection from creditors. These companies add to a pile-up of roughly 70 lenders that have ceased doing business in the last six months.
Some lenders that scale back or fold may still fund loans that are already in the pipeline, but others won't, leaving borrowers scrambling, said Greg Nierenberg, branch manager at Approved Capital Mortgage in Woodland Hills.
"For borrowers, it's a white-knuckle ride," he said.
How can borrowers handle today's manic market? Advice from the experts:
It's always been important to shop around, but never more than today, said Greg McBride, financial analyst with BankRate.com. There's a wide range in loan rates, particularly for those over $417,000. On Tuesday, banks listed on BankRate were quoting rates from 6.4% to 8.1% for a $500,000, 30-year, fixed-rate mortgage for a credit-worthy borrower in Los Angeles.
That difference is more than pocket change. At 6.4%, this borrower would pay $3,127.53 a month versus $3,703.74 on an 8.1% loan.
Moreover, rates are increasingly volatile. Nierenberg said one recent day he called the same lender four times in 24 hours to shop one consumer's loan. Each time, the rate was different.
"It went from 7% to 8.875% to 8.65% to 8.75%," he said. "It's just chaos."
Nierenberg suggests that borrowers have two loan agents shop for them to ensure they get a wide array of quotes and the best deal.
Most lenders allow consumers to lock in a rate for a set period of time, usually 30 days. Consumers can lock in the day they apply, or wait until later in the loan process, Nierenberg said. Normally, the downside to locking in immediately is that the consumer could miss out on a lower rate later. (Although some lenders will reduce your rate if they fall after you lock.)
Today, with lenders folding left and right, Lazerson said it was imperative to get an approval, a rate lock and a good-faith estimate of closing costs immediately -- and in writing.
"If you have those three things, you can be pretty certain that the loan will go through," he said. "If you don't, you're taking a chance."
Standard borrowers -- meaning those with good credit, a 20% down payment and a loan amount under $417,000 -- have little trouble finding plenty of lenders competing for their business, McBride said. As a result, rates for these loans are considerably lower. The average rate for such a loan last week was 6.22%.
But boost the loan amount over $417,000 and the average rate jumps to 6.8%, he said.
If a borrower doesn't meet standard "good credit" guidelines -- a FICO credit score below 660 -- or if he has a down payment of just 5% or 10%, he'll pay even more, Lazerson added. How much more varies dramatically based on the borrower's exact credit score and how much he's borrowing.
A good credit risk borrowing up to 90% of a home's value, could still find a rate in the 7% to 8% range. Someone with a poor credit score who puts only 5% down would pay more than 10%.
The average California borrower took out a $436,749 mortgage during the first half of 2007, according to DataQuick Information Services -- just $19,749 over the conforming loan limit.