Lenders Get Tougher
Qualifying for a Mortgage Becomes Harder,
Even for Applicants With Good Credit,
As Banks Probe Deeper Into Personal Finances
By RUTH SIMON
May 15, 2007
Mortgage lenders are beginning to scrutinize borrowers more closely, causing some loan applicants, even those with good credit, to face higher costs and more hassles.
As the number of delinquent mortgages climbs, lenders have tightened their standards for issuing loans, including such well-publicized moves as raising minimum credit scores and cutting back on 100% financing and low-documentation loans. Now, some lenders are probing more intently would-be borrowers' finances. They are taking a tougher look at how much the property a borrower wants to buy is worth. They are peering further into clients' pasts for credit problems and requiring more in-depth reviews of borrowers who say they are self-employed. Some lenders are taking a harder stance when it comes to whose credit score a couple can use when applying for a mortgage, rather than simply allowing them to use the higher of the two scores.
"There's no question that [lenders] are digging deeper," says Doug Duncan, chief economist of the Mortgage Bankers Association. "The pendulum is swinging a little farther to the conservative side," he says.
Tighter lending standards are adding pressure to an already soft housing market. Last week, the National Association of Realtors forecast the first annual decline in the median price of an existing home since the group began tracking home prices in the late 1960s, in part because mortgages are more difficult to get.
Increased scrutiny by lenders is meant to weed out problem loans and reduce mortgage fraud. But it also can inconvenience borrowers. Jordan Lipton, a physician, got waylaid by tougher appraisal standards when he recently applied for a mortgage to finance the $1.05 million purchase of a four-bedroom home in Charlotte, N.C.
The lender, American Home Mortgage Corp., requested two appraisals of the property, and then sought a price opinion from a real-estate broker, who said the home was worth just $750,000, well below the $885,000 Mr. Lipton wanted to borrow, according to Mr. Lipton's mortgage broker. Mr. Lipton was able to get the financing he needed from another lender two weeks later, but by that time the rate on his loan had risen a quarter percentage point to 6 3/8%. "It's ended up costing us a lot more over a 30-year period," he says. The higher rate could amount to tens of thousands of dollars in added interest payments over that time.
Mr. Lipton's broker, Daniel Jacobs, chief executive of Empire Equity Group's 1st Metropolitan Mortgage unit, says the two appraisals supported his client's purchase price. But he says getting a third layer of verification -- the broker's opinion -- was "an overreaction" to the rise in problem loans, especially because his client had good credit and provided full documentation of his income and assets.
American Home Mortgage says it can't comment on specific loan applications. But the company says it has increased its use of broker price opinions and is taking other steps, such as more detailed reviews of "stated-income" loans, in which borrowers don't provide documentation of their income.
Mortgage lenders say they are tightening standards in response to pressure from mortgage insurers, investment banks and investors who buy mortgage-backed securities. Spooked by rising delinquencies, Wall Street is now pushing lenders to beef up their underwriting. "We're not dictating this, the market conditions are dictating it," says Donald Henig, president of American Home's wholesale division.
Mark Milner, senior vice president and chief risk officer for PMI Mortgage Insurance Co., says he's been encouraging lenders to focus more on "soft" underwriting guidelines. That can mean more detailed reviews of a borrower's credit history and a look at how much cash a borrower will have after paying the mortgage and other debts.
Bear Stearns Cos.' EMC Mortgage unit, which buys loans from mortgage lenders that are then packaged into securities, is running each loan it receives through a computer model to ensure that the appraisal submitted with the loan application provides an accurate measure of how much the home is worth. If the appraisal comes in too low, the lender may have to hire an independent reviewer. EMC is also asking for e-mail addresses and cell phone numbers for borrowers, information it hadn't requested before, and is calling borrowers who have adjustable-rate mortgages to make sure they understand that they have an ARM that will eventually reset.
In many cases, the added scrutiny is invisible to borrowers. But others are already feeling the changes. Thomas J. Freet, an analyst who lives in Auburn, Wash., recently paid $200 for a "drive-by" appraisal of the home he was buying. In a drive-by, an appraiser reviews comparable sales and looks at the exterior of the property, but doesn't go inside.
Because of Mr. Freet's large down payment of more than 25%, he says "it doesn't seem like too much of a stretch [for the lender] to think they would easily get their money back." In the past, borrowers such as Mr. Freet typically would have been asked to get only a computerized assessment of their property's value (cost: about $50), says Adam Stein, his mortgage broker.
The increased attention to appraisals and other underwriting policies follows a period when lenders made it increasingly easier for borrowers to get a mortgage. Often borrowers didn't have to document their income or assets, even if they had relatively low credit scores.
Looser standards weren't much of a problem when home prices were climbing. But as the housing market has cooled, more borrowers are winding up in trouble. The mortgage delinquency rate climbed to 2.87% in the first quarter from a recent low of 2.03% in late 2005, according to Equifax Inc. and Moody's Economy Inc.
Some lenders are also doing more to ensure that the property is as described by the borrower. For instance, they are checking Web sources such as craigslist.org to determine whether a second home is really an investment property, which is considered riskier. Richard Redmond, a mortgage broker in Larkspur, Calif., says one of his clients was turned down at the last minute for a refinance on a rental property after the lender determined that it was a bed and breakfast, which is considered a commercial property.
"The increased scrutiny we're getting now would have been normal in the 1990s," although the Internet gives lenders today immediate access to more complete information, says Mr. Redmond. The broker says he supports the return to tighter lending standards because it will boost the confidence of investors who buy mortgage-backed securities, which will help keep rates low while providing liquidity for the housing market.
Self-employed borrowers also are facing more scrutiny. "They want to know if you have a business license. They'll check 411. They'll Google you," says Mitch Ohlbaum, a mortgage broker in Los Angeles.
IndyMac Bancorp Inc. is among those taking a closer look at applications in which borrowers' merely "state" their income instead of documenting their earnings. In an effort to assess whether that income seems reasonable, underwriters are considering how long borrowers have been on the job, where the job is located and borrowers' income compared to their assets. They also are using sources such as Salary.com to compare that income to industry averages. "Like other lenders, we are scrutinizing our guidelines in the current climate," an IndyMac spokesman says.
Lenders are also delving deeper into borrowers' employment and credit histories. Michael Moskowitz, president of Equity Now Inc., a New York based mortgage lender, says in recent years lenders would often look back just 12 months at a borrower's mortgage payment history. Now, he says, they are looking at two years' of mortgage payments and reviewing information on credit card payments and installment loans.
Other changes make it less likely that borrowers can pick the credit score that puts them in the best possible light. Armand Cosenza, a mortgage broker in Cleveland, recently closed a loan for a husband with a 705 credit score and a wife whose score was 640. The lender used the 640 score to determine the interest rate the couple would be charged, says Mr. Cosenza. In recent years, he says, the couple would have been able to use the husband's higher credit score to secure an interest rate that was 0.25 to 0.5 percentage point lower.
Qualifying for a Mortgage Becomes Harder,
Even for Applicants With Good Credit,
As Banks Probe Deeper Into Personal Finances
By RUTH SIMON
May 15, 2007
Mortgage lenders are beginning to scrutinize borrowers more closely, causing some loan applicants, even those with good credit, to face higher costs and more hassles.
As the number of delinquent mortgages climbs, lenders have tightened their standards for issuing loans, including such well-publicized moves as raising minimum credit scores and cutting back on 100% financing and low-documentation loans. Now, some lenders are probing more intently would-be borrowers' finances. They are taking a tougher look at how much the property a borrower wants to buy is worth. They are peering further into clients' pasts for credit problems and requiring more in-depth reviews of borrowers who say they are self-employed. Some lenders are taking a harder stance when it comes to whose credit score a couple can use when applying for a mortgage, rather than simply allowing them to use the higher of the two scores.
"There's no question that [lenders] are digging deeper," says Doug Duncan, chief economist of the Mortgage Bankers Association. "The pendulum is swinging a little farther to the conservative side," he says.
Tighter lending standards are adding pressure to an already soft housing market. Last week, the National Association of Realtors forecast the first annual decline in the median price of an existing home since the group began tracking home prices in the late 1960s, in part because mortgages are more difficult to get.
Increased scrutiny by lenders is meant to weed out problem loans and reduce mortgage fraud. But it also can inconvenience borrowers. Jordan Lipton, a physician, got waylaid by tougher appraisal standards when he recently applied for a mortgage to finance the $1.05 million purchase of a four-bedroom home in Charlotte, N.C.
The lender, American Home Mortgage Corp., requested two appraisals of the property, and then sought a price opinion from a real-estate broker, who said the home was worth just $750,000, well below the $885,000 Mr. Lipton wanted to borrow, according to Mr. Lipton's mortgage broker. Mr. Lipton was able to get the financing he needed from another lender two weeks later, but by that time the rate on his loan had risen a quarter percentage point to 6 3/8%. "It's ended up costing us a lot more over a 30-year period," he says. The higher rate could amount to tens of thousands of dollars in added interest payments over that time.
Mr. Lipton's broker, Daniel Jacobs, chief executive of Empire Equity Group's 1st Metropolitan Mortgage unit, says the two appraisals supported his client's purchase price. But he says getting a third layer of verification -- the broker's opinion -- was "an overreaction" to the rise in problem loans, especially because his client had good credit and provided full documentation of his income and assets.
American Home Mortgage says it can't comment on specific loan applications. But the company says it has increased its use of broker price opinions and is taking other steps, such as more detailed reviews of "stated-income" loans, in which borrowers don't provide documentation of their income.
Mortgage lenders say they are tightening standards in response to pressure from mortgage insurers, investment banks and investors who buy mortgage-backed securities. Spooked by rising delinquencies, Wall Street is now pushing lenders to beef up their underwriting. "We're not dictating this, the market conditions are dictating it," says Donald Henig, president of American Home's wholesale division.
Mark Milner, senior vice president and chief risk officer for PMI Mortgage Insurance Co., says he's been encouraging lenders to focus more on "soft" underwriting guidelines. That can mean more detailed reviews of a borrower's credit history and a look at how much cash a borrower will have after paying the mortgage and other debts.
Bear Stearns Cos.' EMC Mortgage unit, which buys loans from mortgage lenders that are then packaged into securities, is running each loan it receives through a computer model to ensure that the appraisal submitted with the loan application provides an accurate measure of how much the home is worth. If the appraisal comes in too low, the lender may have to hire an independent reviewer. EMC is also asking for e-mail addresses and cell phone numbers for borrowers, information it hadn't requested before, and is calling borrowers who have adjustable-rate mortgages to make sure they understand that they have an ARM that will eventually reset.
In many cases, the added scrutiny is invisible to borrowers. But others are already feeling the changes. Thomas J. Freet, an analyst who lives in Auburn, Wash., recently paid $200 for a "drive-by" appraisal of the home he was buying. In a drive-by, an appraiser reviews comparable sales and looks at the exterior of the property, but doesn't go inside.
Because of Mr. Freet's large down payment of more than 25%, he says "it doesn't seem like too much of a stretch [for the lender] to think they would easily get their money back." In the past, borrowers such as Mr. Freet typically would have been asked to get only a computerized assessment of their property's value (cost: about $50), says Adam Stein, his mortgage broker.
The increased attention to appraisals and other underwriting policies follows a period when lenders made it increasingly easier for borrowers to get a mortgage. Often borrowers didn't have to document their income or assets, even if they had relatively low credit scores.
Looser standards weren't much of a problem when home prices were climbing. But as the housing market has cooled, more borrowers are winding up in trouble. The mortgage delinquency rate climbed to 2.87% in the first quarter from a recent low of 2.03% in late 2005, according to Equifax Inc. and Moody's Economy Inc.
Some lenders are also doing more to ensure that the property is as described by the borrower. For instance, they are checking Web sources such as craigslist.org to determine whether a second home is really an investment property, which is considered riskier. Richard Redmond, a mortgage broker in Larkspur, Calif., says one of his clients was turned down at the last minute for a refinance on a rental property after the lender determined that it was a bed and breakfast, which is considered a commercial property.
"The increased scrutiny we're getting now would have been normal in the 1990s," although the Internet gives lenders today immediate access to more complete information, says Mr. Redmond. The broker says he supports the return to tighter lending standards because it will boost the confidence of investors who buy mortgage-backed securities, which will help keep rates low while providing liquidity for the housing market.
Self-employed borrowers also are facing more scrutiny. "They want to know if you have a business license. They'll check 411. They'll Google you," says Mitch Ohlbaum, a mortgage broker in Los Angeles.
IndyMac Bancorp Inc. is among those taking a closer look at applications in which borrowers' merely "state" their income instead of documenting their earnings. In an effort to assess whether that income seems reasonable, underwriters are considering how long borrowers have been on the job, where the job is located and borrowers' income compared to their assets. They also are using sources such as Salary.com to compare that income to industry averages. "Like other lenders, we are scrutinizing our guidelines in the current climate," an IndyMac spokesman says.
Lenders are also delving deeper into borrowers' employment and credit histories. Michael Moskowitz, president of Equity Now Inc., a New York based mortgage lender, says in recent years lenders would often look back just 12 months at a borrower's mortgage payment history. Now, he says, they are looking at two years' of mortgage payments and reviewing information on credit card payments and installment loans.
Other changes make it less likely that borrowers can pick the credit score that puts them in the best possible light. Armand Cosenza, a mortgage broker in Cleveland, recently closed a loan for a husband with a 705 credit score and a wife whose score was 640. The lender used the 640 score to determine the interest rate the couple would be charged, says Mr. Cosenza. In recent years, he says, the couple would have been able to use the husband's higher credit score to secure an interest rate that was 0.25 to 0.5 percentage point lower.
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