It takes more than good credit to get a mortgage these days.
Lenders across the country, stuck with piles of loans investors wouldn't buy, are jacking up rates and imposing stricter requirements on even the most creditworthy borrowers. And once again, to close a deal, home shoppers often have to put down their own money, prove what they say they earn, as well as show a track record for payment.
The credit tightening, while viewed by some as a return to sanity after years of lending excesses, nonetheless threatens to squeeze out even more cash-strapped borrowers, extending the housing downturn and distressing the rest of a debt-laden economy.
"Every single day, there are lenders putting a freeze on something," says Dana Bain, president of Premiere Mortgage Services, a Sterling, Mass., brokerage focusing on prime borrowers.
"You're talking about a huge segment of the market being taken out" because of the more stringent lending guidelines, he adds.
The shift started in mid-2006, when rising defaults on mortgages to people with patchy credit history led lenders to raise standards for approving loans to so-called subprime borrowers.
But the forced tightening proved too late both for Wall Street, which already had been saddled with defect loans ineligible to be funneled into securities for sale, and for small lenders who relied on financing from investment banks.
With funding cut off, some 100 lenders have closed their doors since late 2006, according to the Implode-O-Meter blog on the mortgage industry. And today, the subprime squeeze has evolved into a broader credit crunch: Investors are shunning anything that reeks of mortgages, more lenders are failing, and the remaining ones are racing to pull purse strings.
Countrywide Financial, the largest U.S. home lender, has cut back on no-money-down, or "piggyback" mortgages even to people with good credit, and now asks for at least a 5-percent down payment.
"As with subprime, more restrictions may be under way" in the prime lending area, John McMurray, Countrywide's chief risk officer, recently told investors and analysts.
Curtailment like this is bad news for Ronny Satloff Halevi, who is looking to buy a $1 million house in what she calls "an average neighborhood" in Los Angeles. But "despite being a strong client with super credit," she couldn't get a loan that covers 100 percent or even 95 percent of the cost of the house, says her broker, Seth Asher, at OlympiaWest Mortgage Group.
"I don't have much savings to put down," says Halevi, a 45-year-old homemaker.
What's behind lenders' decision to move away from no-money-down mortgages is investors' plunging appetite for those loans, due to their higher-than-average default rate.
With a piggyback mortgage, a borrower takes out two loans, with the first covering 80 percent of the home's purchase price and the second covering the rest. Such a package allows the borrower to avoid paying mortgage insurance required by lenders when the down payment is less than 20 percent of the cost of the house.
In 2005 and 2006 -- the tail end of the most recent housing boom -- about 40 percent of first-time home buyers bought with no money down.
Now the downside: When a borrower defaults on the second loan, the lender often can't recover any of the principal and interest due from a sale of the home, because the proceeds from the sale often are not enough to pay back the provider of the first mortgage.
Countrywide officials have said more creditworthy borrowers are falling behind on second-lien loans for such reasons as illness, divorce or job loss. High leverage, after all, makes it harder for people to cope when financial wrinkles such as those emerge, just as heavy borrowing is wreaking havoc now on businesses ranging from lenders to hedge funds amid the credit crunch.
In addition, banks including Wells Fargo and Wachovia are curbing so-called Alt-A mortgages, which are made to creditworthy borrowers who don't want to document their claimed income or assets.
IndyMac Bancorp, one of the biggest Alt-A lenders in the country, recently told staff it has to make "major changes" in its underwriting practice, as the market for mortgage bonds has become "panicked and illiquid."
For the same reason, Impac Mortgage Holdings recently has suspended funding such loans and instead originates only "conforming" mortgages that qualify for sale to Freddie Mac and Fannie Mae, government-sponsored mortgage-finance giants and two of the largest buyers of home mortgages in the secondary market.
Lenders have to use their own capital to hold the loans they can't sell, resulting in funding and profit pressures. And that's why rates for big mortgages have jumped in recent days, while rates on conforming loans have held steady or dipped.
The mortgage market panic, meanwhile, has choked off funding to such prime-focused lenders as American Home Mortgage Investment, further draining liquidity for homeowners. Even Thornburg Mortgage, a lender catering to wealthy borrowers, appears to be having difficulty lining up financing, according to bond-rating agencies.
Asher, the broker in Beverly Hills, fondly remembers a flier distributed by a now-defunct lender just a year ago that offered to finance the entire purchase price of as high as $1.4 million and required no proof of claimed income.
"My colleague jokes that he wants to sell it on eBay as a relic from the past," he says. After all, no lender is offering that kind of product right now. "Not even close," he adds.