Lenders Crack Down After Subprime Collapse
Since the beginning of the subprime mortgage industry meltdown early last year, the online Mortgage Lender Implode-O-Meter, run by Emory University librarian Aaron Krowne, has recorded 76 outfits that have "gone kaput." As for the lenders left behind, they have been causing headaches for borrowers and mortgage brokers alike.
Lending horror stories have filled online message boards: borrowers who were denied refinancing until they boosted their scores, or self-employed home-buyers put through rigorous underwriting and ultimately levied high interest rates. Most frustrating, perhaps, is that many of these people could have easily received loans and refinancing only months ago.
The subprime collapse, in part caused by loose lending restrictions, has motivated lenders to crack down on credit to weed out risky loans and prevent foreclosures. The credit crunch has made it harder for subprime borrowers—those with credit scores of 620 or lower—to get certain loans, especially with no money down. It has also slowed down the process with stricter underwriting and closer analysis of home appraisals. A recent Federal Reserve Board loan officer survey showed 56 percent of lenders had tightened their standards on subprime loans. And prime borrowers are not immune: Fifteen percent of lenders are scrutinizing applications of customers with good credit scores, too.
Loans requiring no down payment have been affected most, lending officials agree. Firms have raised the minimum credit score needed to receive a fully financed loan from around 570 to 620, and they are taking a closer look at job security, stable income, and past history of delinquencies. At online lender Quicken, chief economist Bob Walters estimates that 10 to 15 percent of the people who could have gotten those loans before no longer can.
Subprime borrowers have been hit the hardest, but within that group, some are feeling the effects more than others. Because lenders who are tightening their standards are now requiring borrowers to better document their income, people such as the self-employed or those who are paid in cash will have a harder time proving they are worthy borrowers. Kevin Miller, the president of Texaslending.com, a Dallas-based lender and brokerage, says that those without a solid paper trail for income will probably need credit scores from 660 to 700 to get 100 percent financing.
Instead, these borrowers must resort to loans with a 3 to 5 percent down payment—a cushion for lenders in this turbulent real estate market. "Lenders want the borrower to have some skin in the game," says Marc Savitt, vice president of the National Association of Mortgage Brokers.
Borrowers with solid credit histories have also been hit by the credit crunch, albeit not as much as their subprime counterparts. Rates on prime loans have remained steady, but closer scrutiny of both credit histories and home values has slowed the process. Property that may have been casually appraised before may run into second appraisals now. On top of that, prime lenders are seeing an increase in business in general, now that a significant chunk of their competition has folded, says Miller.
The pressure to tighten credit has come from everywhere—insurers, the government, and within lending institutions themselves—but, ultimately, bond holders are driving the trend. "It all starts with the people who are holding [mortgage loans] as an investment," Walters says.
Mortgage brokers, meanwhile, are scrambling to make sense of the fallout. As lenders have quietly adjusted their standards, brokers have rarely been told of the changes and were made aware of them only when a client was rejected for a loan. "You're walking on eggshells trying to get someone in closing," says Miller. "We have to be very careful what we say we can get done. We used to be able to say with certainty."
Members of Congress, such as Senate Banking Committee Chairman Christopher Dodd, have threatened to get involved, and Federal Reserve Chairman Ben Bernanke has lightly nudged lenders to re-evaluate their underwriting practices. Most lenders reject government interference in the loan approval process and are confident that the more volatile companies have already fallen by the wayside. "The market has clearly corrected itself pretty quickly," says Walters. "It has cleaned house in areas where [standards had] gotten too loose."
The ultimate victims of tightening credit standards are the potential borrowers who get left behind when trying to buy homes. While restrictions will exclude those who just aren't ready for homeownership, others sitting on the fence may "get knocked the wrong way," says Savitt. "We have to be very careful," he adds. "It's a balancing act."