SANTA CRUZ (April 20, 2008) - As we were all enjoying the relaxed underwriting guidelines, low rates and the resulting increase in home values, little did we realize that there would ever come an end to the good times. When borrowers, many of whom should never have bought homes in the first place, started defaulting on their mortgages at ever increasing levels, mortgage lenders started reeling from the losses and before we knew it the mortgage meltdown was upon us.

According to the website, www.ml-implode.com, 251 ‘major U.S. lenders’ have gone out of business since late 2006. Some local lenders have closed their doors and, undoubtedly, countless other smaller lenders have gone out of business as well. Needless to say, the mortgage industry is going through a period of extraordinary change and upheaval.

The pendulum of easy-to-get mortgages swung way out to one extreme and probably peaked in early 2007. In a knee-jerk reaction to protect themselves, lenders quickly tightened up their underwriting guidelines and then we found the pendulum had swung way out the other way. For a month or two at the end of summer last year, mortgage rates spiked up overnight by 1 to 2 percent for jumbo loans and they became extremely difficult to come by, even for the most credit worthy borrowers.

As lenders re-examine their guidelines and as the government injects cash and implements and debates the pros and cons of various economic stimulus concepts, many rumors and myths have caused a great deal of confusion for prospective homebuyers and homeowners who are considering whether or not they should be seeking financing.

First the good news: mortgage rates are near historic lows and lenders have plenty of money to lend. While 100 percent financing options are no longer available, it is possible to buy a home with 10 percent down and with an FHA loan, a down payment of 5 percent or less can work. FHA may also be able to fill some of the demand that subprime had met. For example, borrowers with credit scores under 600 may still qualify for a mortgage, co-signers will help bolster the ability of homebuyers to obtain a mortgage and the down payment may all be gift. For conventional loans, believe it or not, some lenders are still offering mortgages to borrowers without any income documentation.

On the downside, the increase in limits of conforming loans that was part of the government’s stimulus package has not (at least not yet) offered much relief for borrowers because lenders have instituted strict underwriting guidelines and the rates for the loans between $417,000 and $729,750 are still nearly 1 percent higher than for loan amounts at or under $417,000. The same is true for the FHA rates. They are higher for the loan amounts between $417,000 - $729,750.

When trying to figure out what is happening with mortgages, borrowers should not be relying on the headlines. I am constantly bewildered by the barrage of negative articles in both newspaper and TV. These articles are often either one-sided or blatantly inaccurate. Check with a mortgage professional that you can trust to find out what is truly happening. Also, keep in mind, because the mortgage industry is in a constant state or flux, what is available today may not be available tomorrow.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.