How the Mortgage Bar Keeps Moving Higher

Home Buyers With Good Credit Confront Increased Scrutiny
And Fewer Choices as Lenders React to Subprime Debacle

By JONATHAN KARP
August 14, 2007; Page D1

Frankie Van Cleave says she has paid all her bills on time for more than three decades, save one car payment that got delayed in Christmas mail. But neither solid credit nor her track record running a number of businesses is sparing the 70-year-old from the turmoil in the home-mortgage market.

Several mortgage brokers had courted her to refinance a $1 million adjustable-rate mortgage she currently carries on her home, on two acres of prime riverfront property in Marietta, Ga. But most of them "dropped me like a hot potato" last week after two appraisals came in below $900,000, she says. Her bank of three decades won't help her after her monthly mortgage payments recently ballooned to nearly $8,200, so Ms. Van Cleave is working 80 hours a week as a technical writer to make ends meet.

GETTING A LOAN

Mortgage lenders are tightening standards, even for borrowers with strong credit. Here are some tips:

• Try to make at least a 5% down payment.

• If possible, put enough money down to avoid taking out a higher-rate jumbo mortgage.

• Be prepared to verify your income through tax or other documents.

• You may be required to have assets on reserve equal to six or more monthly payments.

"A good credit record doesn't count for anything now," Ms. Van Cleave says of her futile refinancing effort. "If you don't have assets, forget it. If you're self-employed, you have real problems in this market."

The impact of the subprime-mortgage crisis is spreading through most segments of the home-lending business, ensnaring more and more people who just months ago might have coasted through a refinancing or home purchase. In addition to raising interest rates on so-called prime mortgages, lenders are tightening requirements for everything from borrowers' income verification and credit scores to home-appraisal reports, and yanking products that had allowed low-risk borrowers to avoid putting any money down.

The consumer market is changing at a dizzying pace, with loan applicants -- even those with strong credit records -- being placed under more scrutiny and given fewer choices than they were just weeks ago. Whereas lenders used to change guidelines a few times a year and would give mortgage brokers advance warning, they are issuing revisions almost daily now and dropping products overnight, industry officials say.

"We thought the dust was going to settle, but instead, it just blew up," says Mitchell Reiner, president of Mortgage Associates, a Los Angeles-based lender that does business in 48 states. "Everyone is being affected."

Yesterday, for example, IndyMac Bancorp Inc. imposed tougher rules on a big product, Alt-A mortgages, a category between prime and subprime that often involves borrowers who don't fully document their income or assets, or those buying investment properties. It is the latest lender to shun 100% financing for borrowers who want merely to state their income. For Alt-A loans that don't have third-party mortgage insurance, IndyMac is insisting on at least a 5% down payment for "all loan sizes and property types," according to guidelines sent to mortgage brokers.

Frankie Van Cleave has had difficulty refinancing the mortgage on her riverfront home in Marietta, Ga.

"Banks want to see that you have a vested interest in the property," says mortgage broker Mark Cohen of the Cohen Financial Group in Beverly Hills, Calif. "Everybody thought the damage would be contained to the subprime market but it has spread to A-paper [products]. The impact is that there are fewer choices" for borrowers.

The curbs for creditworthy borrowers have accelerated in the past month as institutional investors have fled mortgage-backed securities, sending stock and credit markets reeling. Major players such as Countrywide Financial Corp. have acknowledged rising defaults among prime borrowers, and have responded by tightening terms for many credit grades. Lenders such as National City Corp. have all but gotten out of the home-equity loan business, while a range of lenders are curtailing their offerings of piggyback mortgages, or second loans above the standard mortgage maximum of 80% of a home's purchase price.

The screws are tightening at the upper end of the market, for so-called jumbo mortgages that exceed $417,000, the limit for loans eligible for purchase and guarantee by mortgage institutions Fannie Mae and Freddie Mac. While lenders used to provide mortgages without proof of income up to the full value of a $1.2 million purchase, now 80% financing for a purchase up to $2 million is the maximum for stated-income mortgages, Mr. Reiner says. And creditworthy borrowers have to satisfy higher asset requirements: Instead of reserves equal to two months of a home's mortgage principal, interest, tax and insurance payments, lenders are demanding six months of reserves, or even more.

The fluid market is frustrating sterling borrowers such as Orange County real-estate agent Valerie Torelli, who recently sought a mortgage for an investment property she bought in Costa Mesa, Calif. She considered a 30-year fixed-rate mortgage of at least $450,000 for the house, which she plans to rent out until the market improves. She says that despite her high credit score of more than 800, lenders wanted 8.75% for a stated-income jumbo loan or 7.25% with full tax documentation, which she didn't want to provide. The average 30-year fixed-rate for a nonjumbo loan, known as a conforming loan, is currently 6.64%, according to HSH Associates.

A week ago, her mortgage banker at Washington Mutual Inc. called with a warning that products were being pulled from the market. Ms. Torelli decided to do something she had never done before for a short-term investment: She injected extra cash equity into the house so as to reduce the mortgage to the $417,000 conforming-loan threshold, and locked in a rate of 6.875%. She paid half a point, or 0.5% of the loan's value, to exempt the loan from a prepayment penalty.

"Jumbo loans weren't cost effective," says Ms. Torelli. "I have great credit and relationships but none of it matters. The market isn't discriminating between me and every deadbeat, zero-down borrower."

In Marietta, Ga., Ms. Van Cleave doesn't have cash for a refinancing down payment, and she faces a problem hitting more consumers: Appraisers say her home is worth less than her current $1 million mortgage. Ms. Van Cleave concedes she took a risk, borrowing close to the appraised value of her home two years ago -- at the market's peak -- to help fund a start-up company that sells a patented fishing-rod holder. She opted for a two-year ARM, with a piggyback mortgage at nearly 12%, and planned to refinance.

But the start-up hasn't taken off, and even as she saw the credit market tightening, she couldn't afford the penalty to refinance her loans early. For months, eager mortgage brokers sought her out, promising to help her roll both mortgages into a single 30-year fixed-rate loan. Then came this month's credit crunch, and appraisals of $858,000 and $890,000. One broker who hasn't abandoned her has offered to pay for a third appraisal. Ms. Van Cleave rejects the first two appraisals, saying that one report has factual errors and neither makes fair comparisons with other homes. She believes she is a victim of appraisers who are being pressured by lenders and are "so afraid they're going to lose business or have their license taken away."

One of the men who surveyed her property doesn't entirely disagree. "The field has changed quite a bit. There is more pressure for tighter appraisals," says Mike Russell. A year ago, he says, lenders weren't as demanding for comparable home prices in the immediate neighborhood, and about 70% of his appraisals ended in approved loans. Today, about 70% of his reports end in rejected loans.

To Washington state appraiser Bill Hanson, the shift is dramatic. Lenders are demanding more comparable home prices and "asking for unrelated information, such as permit numbers for remodeling work," he says. "Before they would ask: 'Is the home still there and does the roof leak?' "