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Obtaining a home loan is going to get even more difficult.Lending guidelines are tightening almost daily for borrowers as the subprime-loan crisis spreads. Those higher-risk loans have just about disappeared as their default rates soar.Now, financing is getting tougher for all homebuyers.On Thursday, megalender Countrywide Financial Corp. had to take out an emergency loan to keep operating, and Tucson-based First Magnus Financial Corp. stopped taking loan applications. Magnus is one of the nation’s top private lender.Earlier this year, New Century Financial Corp. and American Home Mortgage Investment Corp. filed for bankruptcy. So far, at least 70 mortgage firms have closed or put themselves up for sale since last year.Because of the meltdown in the mortgage market, lenders have begun requiring higher credit scores and bigger down payments from all borrowers. They also are charging higher interest rates to people who want to buy a home for $417,000 or more because fewer lenders want to fund them.The tighter mortgage market will work to slow metro Phoenix’s housing market. Real-estate analysts say the new lending restrictions could knock 10 to 15 percent of home buyers out the market because they can’t get funding. That could significantly affect the local market, where a record number of homes are for sale and where sales are already down about 25 percent from 2006’s pace. “The mortgage market has changed drastically in just the past few weeks,” said Tom Miner of the Scottsdale-based mortgage firm Miner Kennedy Chmura Associates. “We are getting calls from buyers who can’t close anymore because lenders want more documentation or money down.”Cheryl Serbic wanted to buy a condominium in central Scottsdale. Earlier this summer, the restaurant manager qualified for an adjustable-rate mortgage that required little down.
But a week before she was to close, her lender said she needed a bigger down payment. Serbic called other lenders and got the same bad news.
“I didn’t think I needed a down payment. My friend bought last year without one,” she said. “But if the housing market is going to keep going down. I’ll save and maybe I’ll find a better deal then.”
Not all the 100 percent financing and no-documentation loans have gone away. But now, lenders are requiring borrowers’ FICO scores to be 20 to 40 points higher than last year. A 10 percent down payment, once considered standard, is now required on many more loans.
“There was a lot of dumb lending done in the past few years,” said Jay Luber of First Horizon Home Loans. “Loan guidelines now are tougher but much closer to normal.”
How we got here
In 2003, lenders started offering a slew of new easier-to-get mortgages that enabled the nation’s housing boom.Borrowers with bad credit and lower incomes could buy homes by getting subprime loans with higher interest rates.Other borrowers could get in with nothing down and without paying private mortgage insurance by using 80/20 or piggyback loans.The 20 percent was typically a home-equity loan that covered the down payment. Lenders also cut back on the income documentation they required on loans. These “no doc” loans opened the door for people to qualify.The housing market was booming. People thought they could refinance into better loans as home prices climbed. Lenders were making money.Then last year, home prices and sales started to slip. The subprime market started to implode as foreclosures on those loans jumped.
Now, the foreclosure epidemic has spread to the Alt-A mortgage market, the segment between subprime and prime loans that includes many 80/20s and no-documentation loans.
Changing guidelines
Lending guidelines are changing quickly.Not only borrowers but sellers looking to move up should make sure they qualify first.The “jumbo” loan market for mortgages of $417,000 has tightened up because mortgage institutions Fannie Mae and Freddie Mac don’t guarantee loans above that amount. The investors who would have backed the bigger loans have pulled back, which is part of the mortgage market’s liquidity problem.Tighter lending practices are also affecting homeowners looking to refinance.In a slowing housing market, some homeowners who got subprime or adjustable-rate and interest-only loans a few years ago are finding they can’t refinance because they don’t have a high enough credit score or their house is worth less than they owe.“Now, their rates are adjusting up, and they can’t refinance because don’t qualify under the new guidelines,” said Andy Griffin of Scottsdale-based Core Mortgage Group.
“It’s a really tough time for a lot of homeowners now, but if people can hold on and make their payments, it will be much better for them than a foreclosure.”
In its newest report, the Mortgage Bankers Association said mortgage markets are “facing a liquidity crisis of a force and magnitude not seen in decades.”
It went on to say the ripple effect will be felt throughout the housing market.
Those effects are already being felt here in the Valley.
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