Want to Super Size that?

Not that they are related...
But with the combination of the collapse of the sub-Prime markets,
the tightening of the credit window,
and the recent bump in short term interest rates have in combination changed the menu on many a mortgage lenders drive thru window.

What's happening?
We're losing the ability to do combo loans.

These are loans that allow a borrower to borrow higher loan to values at lower blended rates.

Let's say you want to buy a home.
You have 10% available for the down payment.
Let's say you want to avoid PMI
(although now that it is tax deductible further analysis is required).
Your trusted mortgage professional sets you up with a great conventional loan of 80% loan to value, they also do a "piggyback" 2nd loan of 10%.
You now have what is called an 80/10/10. That's a combo loan. Make sense?

This was the way many purchases were structured especially here in CA.

Lately we've seen many lenders backing out of the second mortgage market.
They would rather do the loan at 90% at a higher rate, than do two loans.

Why?
Liability in part.
As loans go bad, the foreclosure process protects the holder of the first mortgage first.
If the house is sold at auction and only yields enough to payoff the first and part of the second, it's the second that takes the hit.

The other part that comes into play is what we call Section 32.
This is named after the code that defines a high cost loan.

It doesn't matter that I've never done a Sec. 32 loan.
The well is drying up for all.

Here's an email I received from a lender stating their concerns.

"Due to an increase in 2nd mortgage rates, there is a possibility that certain loans may fail the section 32 APR test. The 2nd mortgage loans most likely to be affected are fixed rate, lower score, high CLTV, stated income/No Doc and 2nd's with negative amortization loans in first lien position. Generally, a combination of two or more of these loan criteria adjustments are necessary to fail the section 32 APR test.

NOTE: We do not purchase or originate a loan that meets the federal definition of a high cost loan (section 32)

A general rule for fixed 2nd mortgages is that the APR can not exceed 14.86% with today's 30 year treasury index of 4.86%. In some cases the adjustments as noted above may exceed this APR in which we would not be able to originate such a loan.

The following is a short summary of the Section 32 Test that is run against all owner occupied loans submitted to us.

1) The Section 32 test is applied to all owner-occupied transactions, both purchases and refinances, 1st and 2nd liens (excluding LOC).

Although the Section 32 Test is not applied to HELOCS, we do apply a company specific high cost test on these loan programs. It is the

fully indexed rate + 10% and is found on the compliance report under the Test Name "Policy Rate." Purchase transactions which fail

the Section 32 test will also have results appear here.

2) An APR Test and a Points & Fees Test is applied to these transactions.

APR Test: The annual percentage rate (APR) cannot exceed by more than 8% (1st liens) or 10% (2nd liens) the yield on treasury securities with comparable loan maturities as of the 15th of the month immediately preceding the month in which the application is received.

Therefore, the APR on the loan transaction is tested against the Index + 8% or 10%. For example, on a 30 year, 1st lien with an application date of 2/10/2007 and an APR of 12.586% would be tested against the following value: 1/15/2007 30 year treasury security index of 4.86% + 8% = 12.86%

This loan would PASS because the APR (12.586%) is below the maximum Section 32 calculation of 12.86%"

Does that all make sense?
If it does, count yourself as one of the elite in the mortgage biz.
I'd say 99% of the loan officers out there don't understand this.

If it wasn't clear here's your Cliff Note Version:
Treasury Bonds have risen. Your loan is not based on a T-Bond but the APR is judged against it.
Because 2nds have higher fees and rates especially on higher loan to value profiles, the APR on these loans may adjust to hit that ceiling.
Key word in all that wording is Fully Indexed Rate.
Fully Indexed means that the worst case scenario rate adjustments happen and the loan hits it's rate caps. So your ARM may start at 8 but could adjust to 14.

Don't want a ARM? Fixed rate 2nds are always available but the rates and fees are higher putting the loan into a possible Section 32 violation. APR is calculated to give a value to these fees in terms of a percentage.

In the end, the lender's answer is to just stop doing combo loans in many cases.
That said, I just approved a 1.2 million refi on a home for a $600,000 first and added a 145,000 HELOC at prime with no cost on the 2nd.

"But Mike, isn't that the opposite of what you just said?"

It is, but the good credit and the great Loan to Value was the difference.
The HELOC is a good idea for many different reasons but we're doing it as a security back up - a reserve account they can tap into in case of an emergency.