Mortgage Loan Requirements Back to the Old Days

Mortgage borrowers, brokers facing higher hurdles to home loans

By Michael Liedtke


Saturday, Aug. 18 2007

SAN FRANCISCO — Mortgage broker Ed Smith Jr. has been arranging house loans for 24 years, and it’s never been tougher for him to close a deal than during the last few weeks of turmoil.

As more lenders collapse, the skittish survivors are raising their rates and
changing the rules for getting a loan every few hours as they scramble to stay alive. The upheaval has made it virtually impossible to secure financing for scores of borrowers who would have qualified easily for mortgages just a few months ago, creating a lending drought likely to deepen the housing slump.

“You have a ripple effect in the marketplace that is devastating,” said Smith, based in San Diego.

The fallout figures to be especially hard on homeowners facing dramatically
higher payments on exotic mortgages that they obtained two or three years ago. These mortgages began with bargain-basement, or “teaser,” interest rates that offered extremely low payments so borrowers could buy a house and refinance later.

But falling house prices and stricter lending criteria have chained these
borrowers to their current mortgages, lumping them with higher payments that they can no longer afford.

“I have three borrowers who desperately need to refinance and they aren’t going to be able to do it. They are going to lose their homes,” said Patrick Schwerdt­feger, a Walnut Creek mortgage broker for Windsor Capital.

Borrowers with blemished credit records and inadequate paperwork to verify
their incomes are having the most trouble getting mortgages.

But the lending crackdown also is affecting more creditworthy borrowers who need to borrow more than $417,000 so they can buy or refinance houses. These so-called “jumbo” loans are common in expensive housing markets like California, where a mid-price house sold for $478,000 in July.

In the last few weeks, the jumbo rates have climbed 0.75 to 1.25 percentage points above the rates for mortgages below $417,000. That higher premium has put the financing out of reach for many borrowers.

The daunting conditions are shriveling the incomes of mortgage brokers, some of whom are making about half the money that they were raking in a year ago, said Thomas Kaiser of Empire Equity Group in San Jose. “Normally, this would be a busy time of the year, but it’s completely opposite.”

The difficult market conditions could work to the advantage of prospective
house buyers who can negotiate the current lending gauntlet and qualify for a mortgage. As sellers find it more difficult to find qualified buyers, people
with financing should be able to negotiate better deals.

“There are good bargains for people with reasonably good credit and a little
money in the bank,” said Ilene Cohen, a broker with First Call Mortgage Inc. in Andover, Mass.

To qualify for a loan, borrowers generally need a credit score of 700 to 720
(on a scale of 850) and enough money for a 10 percent down payment. They also need to be able to verify incomes.

These criteria aren’t radically different from the demands that lenders made
through most of the 1980s and the first half of the 1990s. But the standards
loosened as Wall Street hedge funds and other investment vehicles became more willing to buy high-risk mortgages bundled into securities. That emboldened lenders to offer 100 percent financing to borrowers who could list just about any income they wanted.

“We are now going back to the old days of lending,” Williams said.

Hmmm… those same old loan requirements didn’t seem to hurt the Reagan
economic boom years that happen at about the same time.

Plus… the housing boom of recent was also fueled by a sluggish stock
market that prompted a lot of folks to transfer funds into real estate.
The investment speculators started using the 100% sub prime loan
rules to buy and flip a lot of real estate. They drove the prices up
artificially and made tons of money, without using any of their own
money in the process. They helped to create and then bust the housing

The migration back to the stock market is hitting the housing sector
now. But it will all work out after the blood stops running in the streets.
Every major dip in the market is just another buying opportunity
for the big boys. They enjoy a good panic day on the street. The
cycle of boom and bust is just an orderly arrangement to those who
know and play the game.
What next?

I have a close friend who runs a Countrywide Mortgage office who said on Thursday of last week that all creative financing is gone mainly because no one will purchase it on the secondary market and no one wants to hold such paper.

The only mortgages that Countrywide will offer in the near future will be Full-Doc A & Alt-A (Jumbo) mortgages and expect that rates on Alt-A paper to be above 7%. The new hot ticket mortgage will be the good old FHA mortgage, problem is many homes will have to reduce price down to the FHA guidelines which in my county (Hillsborough, FL) is $222,300. Ouch!