Mortgage crisis: Home loans are harder to get

Wake-up call! If you're ready to buy or refinance a home, the turmoil on Wall Street may be further hurting your chances of getting a loan.

In a huge sell-off Friday, investors reacted to a mortgage industry crisis not seen in decades.

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Some lenders are shutting down, laying off thousands of employees and leaving buyers in the lurch. Interest rates and the terms of loan offers are changing daily. And borrowers with tarnished credit are facing deal-killing loan terms if they can find a loan at all.

Stock investors' wariness about the housing market spilled over Friday, driving a 281-point loss in the Dow Jones industrial average.

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While poor repayment of "subprime" loans to borrowers with blemished credit is the primary concern, there are a few signs that more blue-chip borrowers are also having problems paying their mortgages.

Lenders are quickly closing the door to borrowers with low credit scores, small down payments for a new home or little equity in their current homes. Homeowners and buyers in high-cost areas such as California, Florida and the Northeast are also reeling as lenders chop "jumbo loan" programs.

"The market for virtually any loans with the slightest element of risk has effectively disappeared," John Bollman, an executive vice president at Cleveland-based National City Mortgage, wrote to his employees.

In explaining the company's latest pricing and product changes that will weed out some of these borrowers, he said, "I have been a mortgage banker for 20 years and have never seen such a severe reaction to credit risks in the market place … (and) things may even get worse before they get better."

Sam Molinaro, chief financial officer for investment bank Bear Stearns (BSC), which has suffered huge losses investing in risky mortgage loans, said the upheaval in the mortgage market is on the same scale as the fallout from the tech-stock bubble in 2000 and the stock market collapse in the 1980s.

Part of the cause is that in June, the Federal Reserve issued guidance for lenders offering adjustable-rate mortgages. Since then, most of the large lenders, including Countrywide and Wells Fargo, have eliminated ARMs that had low "teaser" rates that were fixed for the first two or three years, then began to rise often above what the homeowner could afford.

While everyone agrees these more prudent lending standards should ensure future borrowers can afford to keep their homes over the life of the loan, many homeowners who got those loans in the past few years are now having grave problems refinancing as their interest rate rises.

Patrick Jones, a 49-year-old baker in the Denver area, bought his home three years ago and has paid his mortgage on time every month.

This month, his adjustable-rate loan reset for the first time, to $1,800, up $450. Loan terms in the current market mean that he can't get relief if he were to refinance.

"Now, I'm just barely making it," he says. "I used to have a steak once or twice a week; now, I'm going to have hot dogs and beans. We used to go to the movies, but we're giving that up."

E-mail alerts about tighter loan standards and higher interest rates from lenders nationwide flooded the in-boxes of employees, mortgage brokers and real estate agents late last week.

"Today alone, I had interest rate changes to loan products from nearly every lender I work with," Pava Leyrer, president of Heritage National Mortgage in Grandville, Mich., said Friday.

Lenders are changing their terms and criteria for borrowers so fast, she said, she can no longer make promises. "A loan may look like it should go through, but until I get all the documents and get to the closing table and have the funds, I don't know."

One would-be home buyer was ready to sign the final documents last week, only to find the lender couldn't come up with the money. Fidelity National Title in Bloomfield Hills, Mich., sent an urgent e-mail about it to all of its brokers, saying: "Our office has just been notified that a purchase closing, being held in our office right now, will not fund as a result of ABC's (American Brokers Conduit) inability to fund ANY loans until further notice."

American Home Mortgage Investment (AHM), based in Melville, N.Y., which owns ABC, fired more than 6,000 employees last week and stopped taking loan applications; Monday it filed for bankruptcy protection. NovaStar Mortgage (NFI) of Kansas City, Mo., said Friday that it "is temporarily suspending approval and funding activity." And Accredited Home Lenders (LEND) from San Diego said it may have to stop making loans and seek bankruptcy protection.

Michael Strauss, American Home's CEO, issued a statement explaining that investors' appetite for mortgage-backed securities and the national housing market "have deteriorated to the point that we have no realistic alternative."

Those sentiments, which sparked the selling on Wall Street Friday, will likely weigh on the Federal Reserve board, which meets Tuesday to set short-term interest rates. While most economists do not expect the Fed this week to cut interest rates, several, including those at investment bank UBS, are now forecasting that the Fed will begin lowering rates in the next six months.

Posted with permission by
Robert Stout - Sr. Loan Officer with AmeriFirst Financial
480-682-6633