March 21, 2007
MarketWatch

Goodbye easy mortgage money

by Amy Hoak

CHICAGO (MarketWatch) -- The era of easy mortgage money has disappeared in the wake of problems in loans made to some of the riskiest borrowers at the height of the housing boom, with lenders now asking for more financial documents, bigger down payments and proof of greater credit responsibility from would-be borrowers.

The tougher underwriting standards won't prevent most mortgage applicants from getting a loan and they aren't likely to remain in place for long, especially if the housing market regains its footing later this year.

But they are limiting options even for the most creditworthy borrowers and forcing first-time home buyers and those with less than stellar credit to go back to the drawing board and rethink their purchase or refinancing options. Lenders also are shying away from loans that cover 100% of a property's value and looking askance at cash-out refinancing requests.

"Lenders who are doing loans for people who have a down payment, jobs and good credit ... they're not pulling in," said Randy Johnson, mortgage expert at Credit.com and author of the book "How to Save Thousands of Dollars on Your Home Mortgage." "If you're at the margin ... you're going to have a little more trouble getting the best loans today."

Those shut out due to stricter lending standards should focus on improving their credit scores and building savings, working toward the goal of buying a home in the future, Johnson said.

"For people who thought they were going to be able to buy a home this year because of this profligate lending ... they can make themselves attractive to the industry again by doing things that should have been doing," he said. "Stop relying on credit. Get your fiscal house in order. There will be lenders standing in line all day."

Affected borrowers

One group of borrowers that will find the going more difficult is made up of those who choose no- or stated-income loans, said A.W. Pickel III, president of LeaderOne Financial Corp. in Lenexa, Kan.. These borrowers, who find it hard to document their income because it is earned irregularly -- say through occasional commissions -- may need to make some concessions.

Case in point: LeaderOne Financial had a no-income, 100% jumbo loan available up until last week, he said. Borrowers who applied for this loan weren't subprime -- in fact, they required a credit score of at least 720. Today, it's a 95% mortgage instead.

Other challenges will hit those on the fringe between prime mortgages, for borrowers who are the best credit risks, and subprime loans, for the risky borrowers, experts said.

Borrowers with a credit score under 620 are likely to feel the most pressure with regard to stricter standards, said Mark Lefanowicz, president of E-Loan.

And credit scores will probably need to be higher for borrowers at the fringe to reach prime status, said Eric Weinstein, president of Centreville, Va.-based Carteret Mortgage Corp. The credit score that separated an A borrower from an Alt-A borrower, the first step down to subprime, used to be about 620 and now is scooting up to the 660 range, he said.

Credit scores, the best known of which is the FICO score created by Fair Isaac Corp., are used by lenders to predict repayment behavior and set interest rates accordingly.

For some of the subprime and Alt-A loans, lending criteria have been changing so often that Weinstein's company is busy "remapping" lenders' offerings, trying to keep up.

"It's driving us crazy," Weinstein said. "Some are staying the same, some are getting tighter and some are out of business," he said of the lenders he deals with.

Another group affected by stricter standards is first-time buyers who may be shut out of homeownership, Lefanowicz said. During recent years, some Realtors' clientele was largely made of first-time buyers, many of whom didn't need a substantial down payment, he said.

"Now, they're going to need more cash to get in, more times than not," he said.

The pendulum

But Weinstein also believes some of these tightened standards won't stick around for long.

"Give it one or two years and it will swing back to where it was," he said. "Right now it's very tight ... it will slowly loosen up as the housing market improves."

What is happening right now is part of the "natural flow of events in the mortgage industry," he said. The reaction isn't unusual at a time when home values aren't rising as they once were; rapid home-value increases inspire more risky loans to be made (because lenders are confident they can easily recoup the mortgage value from the appreciated sales price if the borrower defaults), while slower appreciation will inspire tighter lending standards, he added.

The pendulum swings back and forth, Pickel said, and depending on the performance of outstanding loans certain products ripped from the list of options today could very well be back in a year.

But the pendulum may not yet have finished swinging to the conservative side. As a result of the problems in the subprime market -- including defaults that are affecting some lenders' books -- some of the stricter lending standards "will move into the prime even if the defaults don't," said Christopher Cagan, director of research and analytics at First American CoreLogic, a provider of mortgage risk analytics and real estate information. He expects that lenders will, in general, be more cautious about the loans they approve.

With many housing markets throughout the country cooling significantly, more homeowners aren't able to tap home equity and instead are missing payments, defaulting on their loans and heading for foreclosure -- often after the interest rate on an adjustable-rate loan resets. That has caught lenders' attention, even if they aren't hit by the subprime fallout, making them more conservative as a result.

In a report released this week, "Mortgage Payment Reset: The Issue and the Impact," Cagan studied 8.37 million adjustable-rate mortgages that originated between 2004 and 2006, and estimated that 1.1 million of those homeowners will end up in foreclosure during the span of six to seven years. The debt from the mortgages will total $326 billion, and after foreclosure and resale, about $112 billion will be lost to remaining equity, lenders and investors over several years, according to the report.

But putting the numbers in perspective, Cagan reported that the losses would translate to less than 1% of U.S. mortgage lending projected for the several-year period, and won't have a debilitating effect on the economy or mortgage lending industry.

"There will be loans for (borrowers) to get," he said. "Wells Fargo and Bank of America aren't going to go out of business for two years and say 'We're not going to make any loans to anybody.'"

Amy Hoak is a MarketWatch reporter based in Chicago.

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