An End to Easy Money
Saturday, March 10, 2007
Even before Goodman Griffin and his girlfriend began house-hunting a month ago, they sat down with a mortgage broker and were pre-qualified for the nontraditional loan they needed to purchase the kind of home they wanted.
So it came as a shock when the loan they thought they had was yanked away from them this week just as the seller accepted their contract on a four-bedroom, $300,000 house in Prince George's County.
"We've been on a merry-go-round, thinking we're going to get the loan, then thinking we're not going to get the loan," said Griffin, 45, who has rented a house. "We have no confidence at this point that we're going to get the house."
More would-be home buyers with blemished credit histories may soon be shut out of the housing market now that lenders are curtailing the number of loans to risky, or subprime, borrowers such as Griffin.
During the first half of this decade, when housing prices spiked, lenders chased after such borrowers, making it easier for them to buy homes they otherwise could not have afforded. But after the housing market cooled last year, delinquencies and defaults spiked, forcing more than two dozen lenders to close, sell themselves to larger firms or report staggering financial losses. Some have chosen to get pickier about borrowers -- a course encouraged by federal regulators.
General Electric's U.S. mortgage arm this week laid off a fifth of its workers because of a jump in defaults and has stopped making some risky loans. New Century Financial, one of the nation's largest lenders to subprime borrowers, said Thursday that it had stopped accepting new loan applications under pressure from its creditors.
BNC Mortgage, the lender that last month pre-qualified Griffin and his girlfriend, chose to tighten its rules. That's why the company withdrew its offer to grant the couple a 100 percent loan, meaning it would not have required them to put any money down, said Matt Smeltzer, a BNC sales executive.
BNC now demands higher credit scores for such loans than it did a month ago, when the couple began the process. "I'm probably turning away about 50 percent of those loans, whereas before I would reject maybe 30 percent of them," Smeltzer said.
Mortgage brokers often get to deliver the bad news because they're the middlemen between borrowers and lenders. Larry Pendleton, a broker with Legend Mortgage in Olney who had been working with Griffin and his girlfriend, has been shopping for a new loan for the couple. The best he could find would cost $2,500 a month instead of $2,300.
"They have some strikes against them," Pendleton said. "They have a decent income of about $110,000 combined, but their credit record is not so great and they have no money for a down payment," which made the 100 percent loan necessary.
Those 100 percent loans, and loans that do not require borrowers to document their income, have been the first ones dropped by some lenders because of their risk. But there are many other types of loans, because as home prices climbed, consumers demanded nontraditional mortgages that lenders happily delivered. Other loans include adjustable-rate mortgages that offer tantalizingly low teaser rates that rise, or balloon, in later years.
The thinking was that as long as home prices kept rising, people could sell their homes or refinance themselves out of trouble. But after prices leveled off last year, delinquencies and defaults followed.