Survey shows borrower demand outstripping supply.

The availability of high loan-to-value mortgages--even in the prime market--seems to be rapidly drying up in 2007.

And it could take its toll on mortgage volume in the months ahead as borrower demand for certain mortgage products appears to be outstripping the supply offered by lenders and investors.

This is one of the findings from a new study that examines the new underwriting environment of 2007. The new research is based on a nationwide survey of mortgage brokers conducted by Campbell Communications of Washington in May. The report, "A Look at the Prime Market after the Subprime Meltdown," is based on the third in a series of annual surveys tracking mortgage brokers on prime lending issues. Among other things, the research analyzes how the nation's top lenders are responding to rising loan problems and flattening or declining home prices.

"To reduce risk, lenders can tighten guidelines, drop programs, or drop brokers from approved status," noted Tom Popik, principal of Geosegment Systems, based in Nashua, NH, and designer of the survey.

"Our survey results show that most major prime lenders are opting to first tighten guidelines--but this causes more work underwriting each loan, which in turn causes increases in underwriting turn times. Broker frustration with slow underwriting is building, even with prime products."

The research found individual lenders employed somewhat different strategies for managing their mortgage lending risk. For example, brokers indicated that lenders such as Bank of America and Washington Mutual were the most aggressive in dropping higher-risk brokers. Meanwhile, CitiMortgage and Countrywide were cited as lenders whose primary focus was tightening underwriting guidelines on individual loans.

Brokers reported that the two prime loan products where supply has dried up the most are 80/20 combo or piggyback mortgages and high LTV loans with private mortgage insurance. These products have been extremely popular with borrowers over the past several years and rapidly rising home prices helped fuel their availability.

"When lenders drop programs to manage risk, they tend to drop high LTV programs," Popik said. "However, that doesn't mean that consumer demand for these products has decreased. Brokers have a good feel for their market and they report that the supply of high LTV products has fallen much faster than demand. Another alternative for investors--instead of dropping programs outright--would be to increase rates." Among other topics, the study shows how specific underwriting guidelines--on both prime and subprime loans--have changed in recent months.

The research also details which products are in greatest demand among borrowers, and which products lenders/investors are most willing to supply.

In addition, the study identifies which lenders have tightened underwriting the most for prime and subprime loans as well as those lenders that have tightened underwriting the least. Also, lenders are rated by individual loan programs. Some 2,800 mortgage brokers responded to the survey, which included more than 100 separate questions related to this year's mortgage lending environment and the broker-lender relationship. The study was sponsored by Inside Mortgage finance, a leading industry newsletter.