As U.S. banks mop up the mess from billions of dollars of bad home loans, buyers are finding the days of cheap money are over and, in many cases, tougher versions of old lending rules now apply.
People of modest means have seen the American dream of home ownership move further out of reach. Even affluent buyers, who took advantage the last decade's low interest rates and looser lending standards to move up to more expensive homes or to buy investment properties, are seeing their options evaporate.
Gone are the days when almost anyone could get a loan with a down payment of less than the traditional 20 percent.
"The clock is rolled back about 20 years," said Lou Barnes, co-owner of Colorado-based Boulder West Financial Services and publisher of Mortgage Credit News.
Such obstacles to obtaining a mortgage are among the actors keeping the depressed U.S. housing market from recovering, which in turn is having a dampening effect on the broader economy.
"You definitely need more money to buy a house than you did a few years ago," said Guy Cecala, publisher of Inside Mortgage Finance. "The days of putting no money down are gone."
Over the last decade, low interest rates, of between 5 and 6 percent, spurred a frenzy of competition and led to "exotic" loan products that made it possible for almost anyone to buy a house.
These days, lenders are balking at anything other than "plain vanilla" loans to would-be buyers with stellar credit histories, significant downpayments and income that can be verified with government tax forms.
Skittish After Subprime Collapse
Data from the last few years shows a rise in so-called "conventional/conforming" loans under the former Fannie Mae and Freddie Mac insured limit of $417,000.
According to Inside Mortgage Finance, such loans accounted for 35 percent of the total mortgage market in 2005 and were 48 percent of the market last year. During the same period,
subprime loans -- loans to poorly qualified borrowers -- fell from 20 percent of the market to 7.8 percent.
Mortgage brokers say that those buyers who still qualify now face higher fees and interest expenses.
For example, interest rates on jumbo mortgages -- or loans above $417,000 -- remain higher than for other loans, despite a relatively low rate of default.
"The market is so skittish right now. (Lenders have) been so burned by their inability to understand the risk of subprime loans that they're translating that to the rest of the market,"
Manny Torres, 38, is among the borrowers feeling the pain inflicted by new income and asset verification rules.
"Online, I see that banks are offering home equity loans at 5 percent," said Torres, a freelance television camera operator who figured he'd have no problem refinancing his $100,000 home
equity loan that is fixed at an interest rate of 8.75 percent.
After all, his Brooklyn, New York, house is valued $200,000 higher than its $600,000 purchase price, his credit risk is low and rent from the upstairs unit brings in $2,000 a month -- more than half of his monthly mortgage payment.
But when Torres called banks, that 5 percent rate was not available.
While he brings in about $85,000 to $100,000 per year, job and medical expenses knock his verifiable income down to around $70,000.
Bankers said the lower number is now insufficient and wanted to see more assets to back the refinancing.
"It's very frustrating that they're being so tight about it," said Torres.
Even the Wealthy Suffer
Like many during the boom, Torres was able to take out a loan by just stating his income, rather than proving it. Those loans came to be known as "liar loans."
As lenders have tightened up, they've knocked out some of the fraudulent borrowing but they are also squeezing people with irregular income flows, like business owners and commission-based workers.
"These are good (low-risk) loans that people are getting turned down on," said Craig Van Skaik, a Beverly Hills, California, mortgage broker at Net Financial Group.
Van Skaik, who has a stable of wealthy clients, said he has been pinched as new rules prevent him from borrowing on the equity he has built up in the $6.2 million house he renovated.
The debt on the house totals about $3.5 million. He has ample assets and income, but he needs an out-of-fashion stated-income loan.
"I can't get one dime out. I don't like feeling like I'm trapped and I can't tap equity," said Van Skaik, who has listed the home and says that because of all the new hurdles, the best buyer is someone who can come in with an all-cash bid.
"I've done this for 22 years. I've never seen anything like what we're experiencing now," he said.