Shifting Housing Market Snubs Bad Credit

David Zionts, owner of Connecticut Mortgage Lenders LLC, poses in his office in West Hartford, Conn., Wednesday, Feb. 21, 2007. He says that some consumers are being squeezed out of the housing market. Zionts says that "Subprime lenders are requiring higher credit scores for higher loan values. Some of the more forgiving guidelines are beginning to go away." (AP Phoo/Bob Child) (Bob Child - AP)

HARTFORD, Conn. -- Homeowners with troubled credit histories are finding it harder to get mortgages or refinance homes because softening in the housing market is making lenders less likely to handle riskier loans.

Several lenders of subprime mortgages _ used primarily for home equity loans and for people with spotty credit _ have shown signs of trouble after the housing bubble popped and more homeowners began defaulting high-interest mortgages.

On Wednesday, shares of Kansas City, Mo.-based Novastar Financial Inc. plunged more than 42 percent to $10.10 per share after the subprime lender posted fourth quarter losses of $14.4 million. Company officials set aside $45 million in anticipation of defaulting mortgages and said they were unsure Novastar would turn a profit in the next five years.

The shifting market is prompting investors to demand higher standards for loan approvals. Loans for 100 percent of a property's value required a minimum credit score of 580 last year, but now require at least a 600 score, said David Zionts, owner of Connecticut Mortgage Lenders LLC.

A high-value loan with no income verification could be had last year with a credit score of 620 a year ago but now needs a minimum score of 640, he said.

"Some consumers are being squeezed out of the market," Zionts said. "Some of the more forgiving guidelines are beginning to go away."

Credit scores are formulas kept by national credit bureaus and used by lenders and credit companies to determine if a consumer is creditworthy. Scores drop when customers fail to pay installment loans on time or have a high income/debt ratio.

Most lenders consider scores above 700 to be a sign of good financial health and scores below 600 to be risky and a reason to increase the interest rate on a loan, according to Fair Isaac Corp., which invented the FICO credit risk score.

Skyrocketing property values in the recent housing boom made it easy for homeowners to borrow heavily against their homes with second mortgages and home-equity loans. But as housing prices leveled off, overextended homeowners are defaulting because they cannot afford higher mortgage payments and can no longer refinance.

The subprime market woes are hurting low-income, minority families the hardest, because they make up a large percentage of subprime consumers, said Howard Karger, a social work professor at the University of Houston and author of "Shortchanged: Life and Debt in the Fringe Economy."

"It's all been a risky proposition and a very dangerous one for low-income people," he said. "Incomes for many people have been flat. Add that to credit card debt and other debt and you're really sitting on a time bomb."

Cassandra Grant of Hartford said she has been having trouble getting a mortgage to buy a home, because her credit score is 585 and her income is below $30,000 a year.