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Lenders rescue the credit impaired

(ran HN edition)

Answer a couple of questions to see whether you fit into what experts call the fastest-growing segment of the American home mortgage market in 1993:

Have you missed a mortgage payment in the past couple of years? It doesn't matter whether you innocently forgot to send in the check until the next month and then corrected your mistake, or you flat-out didn't have the money. All we're talking about here is what's called "1 x 30" in home loan lingo: You were late once by 30 days or more on your payment.

Have you been late more than once in the past 24 or 36 months_i.e., you went "2 x 30" or "3 x 30"? Have you even gone to "1 x 60" by falling behind 60 days or more on your mortgage?

Have you been more than a month late on any of your car payments, educational loans, home equity credit lines, department store charge accounts or your American Express bill?

Is your debt-to-income (DTI) ratio on the high side at the moment? For example, have you or your spouse lost your job or a portion of your income, thereby cutting household income to the point where 40 percent or more of your pay goes to your monthly mortgage? It doesn't matter if you're still paying off your loan like clockwork every month. The name of the game is how badly your DTI ratio is out of whack.

If you answered yes to any of these questions, you're automatically part of a little-publicized multibillion-dollar mortgage boom under way: "A-minus, B and C" homeowners, refinancers and new buyers who no longer qualify for "conforming" ("A" quality) loans.

Conforming mortgages are those whose credit underwriting standards follow the strict mandates of mega-investors like Fannie Mae and Freddie Mac. Such standards require lenders to send borrowers with "1 x 30," "2 x 30" or other credit blotches on their records out the door.

Yet hundreds of thousands of Americans have dropped into the non-conforming credit category since 1990, experts say, because of widespread recession-related job layoffs and temporary income declines in many markets. Large numbers of these home owners are in fact excellent credit risks, but have been hit by financial setbacks that simply threw them off track for a month or two. Once their missed payments get reported to credit bureaus, however, they're "marked" for anywhere from two to seven years. Conforming lenders won't _ or can't _ lend money to them at regular rates.

"The prototypical "B' borrower," says Heidi Berk, president of Connecticut-based Atlantic Capital Markets Corp., "is the guy who had an excellent job, an excellent credit history and then got laid off. After trying like crazy to keep up on all his payments, he misses a couple" before finding a new job.

When he goes to refinance or to get a new home mortgage, the borrower suddenly confronts his new reality: He's damaged goods when it comes to credit. He's Hester Prynne sitting in front of loan officers, but his scarlet letter is a "B," not an A.

Happily for such borrowers, the mortgage market is undergoing major changes. Rather than forcing credit-impaired home owners to deal with finance companies whose lowest rates start in the double-digits, large mortgage sources are creating a secondary market for "A-minus, B and C" loans, funded by the same Wall Street and foreign investors who supply capital for "A" mortgages.

Nationally known firms like G.E. Capital, Advanta Mortgage and Conti Financial (Continental Grain) are offering B and C mortgages at rates that range anywhere from 7 percent on up.

The entrance of major firms and Wall Street into the market, according to Advanta Mortgage senior vice president Greg Bowcutt, "has made rates far more competitive (for B and C borrowers) than anyone's ever seen."

For example, here's a current national rate overview provided by Berk of Atlantic Mortgage Capital: For "A-minus" borrowers (1 x 30), figure on fixed rates of 8 3/8 to 8 1/2 with 2 to 3 points. For B borrowers (2 x 30 plus some credit card late payments) fixed rates begin at 9 3/4 percent plus 3 points. For C borrowers (3 x 30 late payments, serious credit card delinquencies and possibly even a bankruptcy) rates start at 10 1/2 with 3 to 4 points. One-year adjustable rate mortgages (ARMs) for A-minus borrowers start in the 7 percent range, rise to 8 1/2 for B borrowers and start at 9 1/2 to 10 percent for C's.

Depending on the specific credit problems experienced by a borrower, most B and C lenders will also limit the maximum loan-to-value ratio to 80 percent or below ($80,000 loan on a $100,000 house), and require penalty fees for prepayment of some loans.

"A lot of people with dings in their credit assume they've got to pay 12 to 14 percent to get refinanced or get a new loan," says Berk. "But that's ancient history. Now we're talking about mortgage rates for B and C borrowers that are lower than rates for squeaky-clean A borrowers just three years ago."

How to hook up with well-priced mortgage money if you're an A-minus, B or C? Ask a real estate broker in your area for recommendations. B and C lenders often advertise directly to the trade, not to the general public. Ask the conventional lender who rejects your loan application as well.

Washington Post Writers Group