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COVER STORY regulators. Then again, with an election hurtling in on us, maybe everything will change again. The elephant in the board- room, without a doubt, is banks' foreclosure overhang. In a late January interview with Bloomberg, Jonathan Miller fore- casted another national 5 to 10 percent home price drop in 2012, and lower mortgage demand. "If credit was at a historical, sort of normal, balanced level, you'd probably have a housing boom with mortgage rates at the levels that they're at, even with high unemployment." The problem, he said, "is the tightness in credit," along with an anticipated long-term increase in foreclosure inventory. He predicted three more years of "above average or heavy" foreclosure volume. "You have to clear the market of the distressed property and essentially we've been stalling or delaying that from happening for a number of years," he said. Unwinding those positions will get home prices to a bottom, which just might shock consum- ers out of their penny-pinching ways—which just might get FICO scores and documentation require- ments down to a point where they're manageable for would-be buyers and lenders alike. The trick, as Wells Fargo's analysts put it, is "working out the legacy of the most recent housing boom without promoting the next boom." Which means there should be a loosening of credit soon, once the patient shakes off its last few symptoms of the old infection. "It's like taking your medicine," Miller said. "The sooner we get this over with, the better we are in the long run." The New Normal Residential Underwriting Standards, Before and After the Deluge. H igher credit scores, bigger down payments and paychecks, and mountains of paperwork are now standard for borrowers seeking a loan, but to truly understand consumers' changing perspectives on the mortgage process, it's important to examine the credit qualifications that borrowers were once accustomed to in the not-so-distant past. Even customers who have previously purchased a mortgage loan find today's requirements confusing at best, and their Underwriting Guideline Maximum Loan-to-Value (LTV) Maximum Combined LTV Maximum Loan Amount Debt-to-Income Ratio (DTI) Minimum FICO Score Bonus/Commission Income Primary Residence Second Home Investment Property Cash-out Refinance Borrower Without FICO Score IRS Form 4506 Required Reserves Gift as Source of Funds Paystub W2s Verification of Employment Escrow (tax and insurance) Chapter 7 Bankruptcy Chapter 13 Bankruptcy Foreclosure Short Sale Deed–in–Lieu Judgments Charge–offs struggle to adapt to the current lending environment hampers both confi- dence and compliance. Based on the new FICOs and LTVs, DBRS analysts said "it is likely that most of the U.S. population will not be able to qualify for a mortgage any time soon." Their upshot: Unless underwriters relax their standards a bit more, and until consumers gain confidence in lenders, mortgage markets will stay stagnant. 2007 100% 125% $2 million 38/45 620 Allowed Allowed Allowed Allowed Up to 100% LTV Allowed Optional 2 months Allowed Most recent 1 year Within 30 days of closing Not required Discharged in last 7 years Discharged in last 7 years None in last 7 years None in last 7 years None in last 7 years None in last 7 years Must be paid in full 2011 80% 80% $1 million 33/38 680–720 Not allowed Allowed Allowed Not allowed Up to 70% LTV Not allowed Required 12 months Not allowed Most recent 30 days 2 years Within 10 days of closing Required Discharged in last 7 years Discharged in last 7 years None in last 7 years None in last 7 years None in last 7 years Must be paid in full Must be paid in full Source: DBRS THE M REPORT | 25