Mortgage Seekers Find Rates Are Down, Credit Standards Tighter

By Sharon L. Lynch
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Sept. 16 (Bloomberg) -- U.S. mortgage rates are dropping. Good luck getting a loan.

Existing home prices have fallen 7.7 percent since their July 2006 high and rates dropped below 6 percent last week for the first time in more than three months. The obstacle for people ready to buy is finding a willing lender, said Suzanne Bach, senior vice president of New York-based Guardhill Financial Corp., and an 18-year home lending veteran.

``Nobody really wants to take risk anymore,'' Bach said in an interview. ``Deals are getting really hard to do now.''

Lenders including Bank of America Corp. and JPMorgan Chase & Co. keep requiring higher credit scores, bigger cash down payments, and more income than was needed to buy a home during the five-year housing boom. Astoria Federal Savings, a Lake Success, New York-based lender that holds mortgages on its books rather than selling them to investors, has even started discounting annual employee bonuses in calculating income.

About 75 percent of U.S. banks tightened standards on mortgage lending to the most credit-worthy borrowers in the three months ended in July, according to the Federal Reserve's quarterly Senior Loan Officer Survey released Aug. 11.

The average U.S. 30-year fixed-rate mortgage was 5.78 percent yesterday, down from 6.08 percent the week before, according to Bankrate.com. The Fed is scheduled to meet Tuesday and may lower its key rate to 1.75 percent from 2 percent which may reduce mortgage rates further.

Lehman Brothers Holdings Inc., the biggest underwriter of mortgage-backed securities, filed for bankruptcy yesterday, part of the credit crisis which has cost financial firms more than $511 billion in mortgage-related writedowns and credit losses.

Tighter Requirements

Bank of America, the nation's largest mortgage lender, tightened requirements over the last six months for a loan program designed to help teachers, police, firefighters and other public servants afford houses in the communities where they work. The bank used to allow zero-down payments under the program, known as Neighborhood Champions, and now requires at least three-percent down.

``If you live in Miami or Las Vegas, you would have to have at least 5 percent,'' said Bank of America spokesman Terry Francisco, referring to two cities where the median sales price of existing single-family homes has dropped 24 percent and 19 percent, respectively, during the past year.

``We're very sensitive to declining markets,'' Francisco said.

Bank of America granted customers $36.6 billion in first mortgages and $22.8 billion in home equity lines of credit in the first six months of this year, compared with $46.4 billion and $35.9 billion in the same period a year earlier, according to a regulatory filing. Combined, loan originations by the Charlotte, North Carolina-based bank fell by 28 percent, or $22.9 billion.

Local Markets

JPMorgan is assessing local housing markets for price declines that may prompt the bank to stop offering certain types of loans.

``We continue to look at them by market and by product because the price of homes is different in some markets even than it was three months ago,'' said Thomas Kelly, spokesman for JPMorgan Chase. ``We're going to verify your income and your assets. We are going to require more equity and we may require a higher credit score.''

The bank has also eliminated so-called ``piggyback'' loans that allowed homebuyers to borrow 80 percent of the mortgage value at one interest rate and an additional 10 percent of the purchase price at a slightly higher rate.

``Tighter standards assure the loans are less likely to fail, but also have had the unfortunate effect of limiting the ability of some first-time home buyers to enter the market,'' said Sara Tinsley Demarest, spokeswoman for the Washington-based Mortgage Bankers Association.

Suspended Operations

More than 100 mortgage companies have suspended operations, closed or sold themselves since the start of 2007, according to Bloomberg data, and investor demand for loans packaged as securities has dried up. The institutions forced to hold loans on their own books have become more risk-averse.

Jerry Tews, a 66-year-old retired clergyman whose credit score is 775 out of a possible 850, had to scramble just two weeks before he was to close on a $350,500, four-bedroom house in Stoughton, Wisconsin, because his mortgage broker, Resource Plus Mortgage Corp. of Inverness, Illinois, changed the terms of his loan offer.

Tews and his wife Lynn wound up agreeing to tack about $130 a month in private mortgage insurance, principal and interest to make the deal happen.

``At that point, we were really needing to move forward,'' said Tews, who was scheduled to sell his old house in Glenview, Illinois, the same day he planned to sign papers for the new place.

Penalty

``The disappointment was to have a kind of a penalty added on,'' he said. ``In our circumstance, it could have been avoided because our credit is good.''

The credit squeeze is contributing to falling home sales. In July, the National Association of Realtors' index of pending home resales fell 3.2 percent, a decline NAR Chief Economist Lawrence Yun blamed on ``overly stringent lending criteria.'' The index is down 6.8 percent since July 2007.

In a May 28 note, Astoria Federal's Vincent Cavalea, director of residential loan production, told mortgage brokers ``overtime and bonus income will only be considered as qualifying income if it can be verified that this income is regular and recurring and there is not excessive dependency on this income to qualify.''

Bonuses

Last year Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman and Bear Stearns Cos. together awarded $65.6 billion in compensation and benefits to their 186,000 employees. About 60 percent of the total came in year-end bonuses.

That makes Wall Street employees heavily dependent on bonus income for real estate purchases, said David Michonski, chief executive officer of real estate broker Coldwell Banker Hunt Kennedy in New York.

``It's something we give a tremendous amount of attention to,'' Michonski said. ``We are expecting fallout from it.''

Around the country, homebuyers looking to purchase property for more than $417,000 are facing some of the toughest scrutiny, said Marve Stockert, executive director of the Illinois Association of Mortgage Professionals and a 38-year veteran of the industry.

``The most difficult thing now is the appraisals are being scrutinized so much more than they have ever been,'' Stockert said. ``The higher the sale price, the more scrutiny that is happening. We're talking two or three appraisals on the same property.''

To contact the reporter on this story: Sharon L. Lynch in New York at sllynch@bloomberg.net