Wary banks revert to strict lending standards

Broussard has found little sympathy from his lender, Countrywide Financial Corp. While Broussard accepts responsibility for taking out a mortgage whose monthly payments are due to skyrocket once the unpaid principal exceeds the home’s value by 15 percent, he feels betrayed by the lender’s unwillingness to negotiate better terms.

The stinginess of banks is showing up in home loan statistics: The value of all new mortgages plummeted to $450 billion in the fourth quarter of 2007, down 38 percent from a year earlier, according to trade publication Inside Mortgage Finance.

Subprime loans, made to borrowers with poor credit, virtually disappeared from the market, plummeting 90 percent to $13.5 billion in the October-December quarter.

There is a silver lining: The Federal Reserve has repeatedly cut interest rates, helping borrowers whose mortgages were just about to reset to higher rates and people with student loans. Reflecting the Fed’s efforts, rates on 30-year mortgages dropped below 6 percent this week for the first time in more than a month.

But the long-term impact of the Fed’s move is far from certain, and the central bank’s actions could end up feeding inflation and pushing up long-term rates.

“The credit crunch is much like the movie villain that refuses to die,” said Greg McBride, a senior financial analyst at Bankrate.com. “The effects are spilling out, far beyond what was originally seen.”

Amid the turmoil, the mortgage industry is playing hardball with borrowers.

Wells Fargo & Co. now requires a 25 percent down payment in the most distressed markets, according to a document sent to mortgage brokers last month. A company spokesman said in an e-mail message that Wells Fargo is “focused, as we’ve always been, on fair and responsible lending and sound credit risk management.”

Some borrowers who took out home-equity loans or second mortgages are being blocked from refinancing. The problem is most common among consumers using two different lenders.

Companies that made second mortgages are now denying requests — common in a refinancing transaction — to take secondary status in the event of a foreclosure. Especially in markets where prices are declining, holders of those loans want to be paid off before a loan is refinanced rather than take on the risk of default, industry experts say.

Lenders’ changes have removed 30 to 40 percent of the borrowers who could have qualified in recent years, estimated Tom LaMalfa, managing director at Wholesale Access, a Columbia, Md.-based mortgage research firm.

Lenders and mortgage insurers are also requiring proof of income and employment, something they didn’t always do during the housing boom.

“It’s no longer people buying pools of loans, strictly written by a computer, and no one knowing what’s in a pool,” said Marc Schwaber, chief executive of Preferred Empire Mortgage Co. in New York. “The loan is going to have to make sense.”

Many in the real estate industry hope that the economic stimulus legislation signed by President Bush earlier this year allowing Fannie and Freddie to back loans larger than their former limit of $417,000 will kick-start the housing market.

And while this week’s interest rate cut by the Federal Reserve could tempt banks to lend more, experts say they are likely to remain skittish for months to come.

“It’s going to take time for banks to tiptoe back into the water,” said Jefferson Harralson, a banking industry analyst with Keefe, Bruyette & Woods Inc.

(Copyright 2008 by The Associated Press.  All Rights Reserved.)

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