Your Mortgage : Major Lenders Woo Credit-Risky Buyers

WASHINGTON —  Some of the largest financial organizations in the country quietly have begun making home mortgages to consumers they formerly avoided: refinancers and home buyers with dents, nicks and even major gashes in their credit histories.

The newest entrant into the burgeoning “B” and “C” market: Prudential Home Mortgage, the second highest-volume private originator of residential loans in the United States. Rather than automatically turning down applicants who’ve had spotty payment histories, Prudential is now giving them a second shot.

Even applicants who’ve been 30 days late on their mortgages as many as three times in the past 12 months--or 60 days late no more than once--may qualify under the giant lender’s new “B” mortgage program. As of the first week of July, the loans will be available in all 50 states through mortgage brokers or the firm’s retail branches.

The financing industry classifies most applicants into one of four broad categories from A to D. Consumers with perfect or near-perfect credit and payment records fit into the top grade. B and C borrowers are those who’ve run into significant economic troubles somewhere along the way--forcing them to fall behind on payments of their debts--but aren’t deadbeats. They have the capacity to pay their debts, but their prior report cards simply scare away banks and most other traditional lenders. Applicants with recent or ongoing bankruptcy filings or mortgage foreclosure proceedings fit into the D category, or even a no-man’s land recognized by some intrepid lenders as E--the pits.

In the wake of the 1990-1992 recession, hundreds of thousands of homeowners have slipped from solid A’s to B and C credit ratings. Typically they’ve been victims of corporate down-sizings, plant closings or regional economic slumps that left them with lower income than they’d enjoyed in the past.

Rather than sending borrowers like these out the door, major mortgage lenders are rushing to come up with programs to attract them as customers. National, publicly traded firms such as American Residential Mortgage Corp. and Plaza Mortgage recently have created separate subsidiaries to do nothing but originate B and C home loans. Other well-known banks and mortgage bankers reportedly have competing programs on the drawing boards or heading for launches.

The motivation for the sudden burst of B and C activity is straightforward: As Prudential Home Mortgage vice chairman Larry R. Swedrowe put it in an interview, “These (borrowers) are often people who’ve had credit problems that were beyond their own control.” With the proper underwriting safeguards--and a higher interest rate than A borrowers get--”they represent a very sound business opportunity” for lenders, he said.

What kind of interest rates and terms can credit-impaired borrowers look for from the new wave of high-volume mortgage lenders plunging into B and C waters? Here’s a quick overview of what you might find.

For starters, you should know that the entire B and C market emphasizes relatively high equity levels in borrower’s homes. For most B grade applicants, lenders will not go higher than a 75% loan-to-value (LTV) ratio. That is, if your house is worth $200,000 and you’re B-rated, don’t expect to get more than a $150,000 mortgage--at least not if you want the lowest available rate. Borrowers with C-grade credit shouldn’t expect LTVs in excess of 65%, and D-grade considerably less.

A second shopping factor to keep in mind: B and C lenders are willing to stretch the limits on your overall debt ratios--often far beyond what you’d find as an A-category applicant. For example, Plaza Mortgage’s subsidiary Option One Mortgage Corp. starts its permissible debt-to-income ratios at 45% and goes to 60%. That means that your total household monthly debt--mortgage, charge accounts, auto loan, college loan, etc.--can be between 45% and 60%.

Contrast that with the standard ratios in the A market, which typically stop at 36% to 38%.

A final hint about shopping: B and C mortgage lenders’ programs have wide variations in underwriting criteria. What one firm considers an acceptable credit risk at a given LTV and debt-to-income level may be shockingly different from a competitor’s. As a result, the best way to find the right loan package in the B and C market may not be to rate shop as you would in the A market. Instead, contact one or more local mortgage brokers in your area, lay out your credit profile and ask them to shop for the best deal.

Mortgage brokers are especially important in this field because firms like Prudential, ADVANTA, American Residential, Option One, Delta and other large B and C lenders depend upon them as their local originators or correspondents. One broker usually does business with multiple lenders, and should know their intricate program variations.

Rates? Depending upon your specific credit history and home equity, look for adjustable rate loans starting in the 7 3/4% to 8% range, and fixed-rate 30-year loans in the 10 1/4% to 10 1/2% range for B borrowers. For C credit loans, add on a percentage point or more.

Distributed by the Washington Post Writers Group.