The unprecedented mortgage meltdown is hammering hundreds of thousands of homeowners nationwide who are trying to buy homes or refinance loans - at both the low end and the high end of the housing market.

The middle of the housing spectrum is still relatively unscathed, at least for now.

"It's a terrible, terrible situation," said Steven Chotin, president of his namesake asset management group in the Tech Center, which structures mortgage- backed security deals. "The market right now is in turmoil."

The Federal Reserve Board's decision Friday to cut its discount rate to 5.75 percent from 6.25 percent should quell the turmoil a little.

Problems started with subprime loans - high-interest, riskier mortgages.

The subprime market helped fuel record foreclosures in the Denver area. In recent months, defaults on subprime loans have spread to other previously hot markets, such as California, Arizona and Florida, increasing their foreclosure rates as well.

Many market observers, especially in Denver, where foreclosures have been raging for the past six years, had been warning that it was inevitable the lax underwriting standards, easy credit and creative financing deals, such as 100 percent loans, interest-only loans, and option ARMs, would lead to a correction, if not a collapse.

For many, it was not a question of if it would happen but when and with what severity.

Those who believed it would drag down the entire economy appear on the right track, with the recent slides in the stock market and the number of mergers and acquisitions and initial public offerings being canceled, questioned or put on the back burner in the wake of the mortgage mayhem.

In addition, a number of commercial real estate sales in Denver haven't closed in the past week when the expected financing dried up, brokers said.

But in the past 10 days, the turmoil, caused by a lack of liquidity as investors stopped buying packaged loans, has spread to nonconforming loans, also known as jumbo loans.

These are loans of more than $417,000, which are not purchased on the secondary market by Fannie Mae and Freddie Mac.

What that means is that even some well-heeled borrowers with good incomes and credit scores are being denied loans, face paying interest rates not seen for decades, or are being told to cough up at least 30 percent at closing.

Veteran mortgage bankers and brokers, some of whom have been in the business for the past three decades, said they have never seen anything like it.

Liana Pomeroy of Cherry Creek Mortgage said she has been scrambling to keep loans afloat, so far with 100 percent success.

"Every single one has been a challenge," she said.

Susan Mathews, a broker at Perry & Co., said that many people are sitting on the sidelines, waiting for the markets to calm down.

"There's no sense of urgency," Mathews said. "People think that the house they are looking for will probably be here, and if not, there will be a lot of other ones to choose from."

In the past week, Mathews was buying a condo as an investment property, and the rate shot up on her. She had been letting the rate float, figuring that it might come down a bit, but instead it went the other way.

She shopped around with other lenders and ended up finding one willing to lock in the lower rate.

"If I hadn't gotten the rate I wanted, I probably would have bought it a higher rate and refinanced it later," Mathews said.

Making sense of it all

With the mortgage market in uncharted waters, with as many whirlpools, rapids and unexpected obstacles as a river-raft trip after a huge snowmelt, it's no wonder borrowers are confused. But it's not just borrowers. Many lenders this week said they haven't seen such tumultuous times in 30 years. So what's a prospective home buyer to do? Here are a few pointers:

What can you expect if you are seeking a conforming mortgage that is sold on the secondary mortgage market to Fannie Mae or Freddie Mac?

You're golden if you qualify for an ordinary loan. Rates are still low, and there's no shortage of them. These loans account for about 80 percent of the market, industry experts say.

But some lenders caution that could change, so you're better locking in now, rather than hoping rates will drop another eighth of a point.

The market should get some relief, at least short-term, from the Federal Reserve Board's decision Friday to cut the discount rate.

What if you are trying to get a loan through Countrywide, or some other struggling lender?

There's a good chance the deal won't close as scheduled or the lender will demand a much higher interest rate or as much as a 30 percent down payment, especially if you are self-employed.

You should work closely with your mortgage broker or mortgage banker to find alternative financing. Lenders are quickly stepping up, offering innovative programs to fill the void.

What if you are trying to take out a nonconforming loan, or jumbo loan (the cutoff is $417,000 for conforming loans in Denver)?

Even if you have been pre-qualified, go back to your lender to verify that you can still get a loan.

Lenders are tightening their qualifications and scrutinizing documents more carefully than they have in years. Also, in some cases, rates are going up and requirements such as the amount of the down payment are changing.

What if I no longer qualify for a loan?

Clean up your credit scores by doing things such as paying off credit-card debt to make it easier to get a loan in the future.

Also, you might get a first loan up to the $417,000 limit for a conforming loan and a second on the remaining debt. If you are close to the $417,000 cutoff, try to come up with enough money to bring the loan amount down to that level.

What do I need to qualify for a loan in this market?

The better your credit history, the easier it is to get a loan and one at a lower rate.

So-called "no document" loans are being replaced with loans that require proof of your income and work history.

What does all of this mean if you are trying to sell your home?

Expect homes to languish even longer, especially in areas where home builders have a lot of land for construction.

Is now a good time to take out an equity line of credit?

If you do so, make sure you are charged interest only when you borrow against the credit line. And make sure you are using the money for something that makes economic sense. Now is not the time to use your home as an ATM machine.

Is it a good time to remodel?

If the home industry continues to suffer, as many think it will, remodelers may be more available and cut their prices to drum up business. The coming months could be a good time to shop around for deals on that upgraded kitchen or bathroom.

rebchookj@RockyMountainNews.com or 303-954-5207

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