The End of 100% Financing?

With many of the subprime lenders either closing their doors or being absorbed into larger companies, Countrywide recently announced that it will no longer be offering 100% financing to home buyers to the extent that they were before. It appears that buyers can still get 100% loans (for now) if they go directly to Countrywide for their loans, but not if they go through a loan broker.

Home buyers can still get 95% loans, but for some, coming up with even a 5% down payment plus closing costs can be quite a challenge. Buyers are starting to look for friends and family for funds as well as the HART Program to help make ends meet when purchasing a home.

Industry experts say that what's happening now is basically a consolidation, where many of the small companies that profited in a booming real estate market are now having trouble finding funding sources.

Countrywide Chief Executive Officer Angelo Mozilo said that "The subprime business was (historically) a business of, you take inferior credit, but you require superior equity. So people had to make a substantial down payment if they had marginal credit. Well, that all disappeared in the last couple of years, and you can get a 100 percent loan with marginal credit. And that doesn't work, particularly if you have any kind of bumps like we've had now in deterioration of real estate values, because people can't get out."

Local Santa Clarita lenders are seeing more trouble in the cash-out refi loans than with the 100% financing, where homeowners took out equity after their initial purchase. Much of these funds went into toys (boats, cars, RV's and vacations) rather than being reinvested into the homes. Some even got these cash-out refi's by using highly inflated comparable sales for the appraisals, which makes it even harder for these homeowners to sell since they owe so much more than their homes are worth.

Of course lenders aren't allowing people to just walk away with a short sale just because they made poor decisions with their refi's - there's got to be something more significant going on, such as a divorce, disability or job transfer, for the short pay to even be considered by most lenders. This will likely bring more foreclosures as cash-strapped homeowners can no longer afford to pay their inflated mortgages once the funds from their cash-out refi's has been used up.