By Dina ElBoghdady
Washington Post Staff Writer
Thursday, August 16, 2007; A01

Joy Siegel, a Bethesda lawyer who handles home-sale closings, uses a spreadsheet to track which mortgage lenders are filing for bankruptcy protection these days.

"It's getting incredibly nerve-wracking for us," said Siegel, president of Settlement Pros. "There are banks I haven't even heard of, pages and pages of them, who have stopped making loans."

Investors were rattled yesterday after a stock analyst predicted that the nation's largest mortgage lender might soon do the same. Shares in Countrywide Financial fell 13 percent after a Merrill Lynch report raised the possibility that the lender could be approaching bankruptcy. The stocks of other financial firms with investments in mortgages, including KKR Financial Holdings and Scottish Re Group, were also battered because of fears that the mortgage problem is metastasizing.

These problems are unfolding in an extremely fragmented industry, which is why it has become difficult for people who are buying or selling homes, and the professionals working with them, to figure out which lenders they can depend on to close a deal.

More than 8,000 lenders operate in this country, according to federal data. Dozens of them have shut down in recent months without warning consumers. Two of the larger ones, American Home Mortgage Investment and Aegis Mortgage, filed for Chapter 11 bankruptcy court protection this month.

For buyers, sellers, real estate agents, settlement lawyers and mortgage brokers, there is no longer reason to believe a deal is done until money changes hands.

Letters from lenders approving loans "used to be a reason to exhale, a reason to believe that a deal is done," said Leisa Hart, an agent with Long & Foster Real Estate. "We no longer have reason to exhale until we've gotten to the settlement table and until that loan has been fully funded."

Eric Iversen learned that the hard way. Half an hour before he and his wife, Catherine, were scheduled to settle on a house in Bethesda, their loan officer at American Home Mortgage informed them that the company would no longer fund any loans, including theirs. The Iversens were among 175 Maryland borrowers who found themselves scrambling for a new loan because of that lender's decision, state regulators said.

"I was driving, talking on the phone on the Beltway, trying to keep the car going in one direction," Iversen said. "My wife was next to me with this stricken look on her face, especially when she heard me say: 'Should we turn around and go home?' "

The consequences went beyond the Iversens. The sellers were relying on that money to close on a house that day. That kind of domino effect can further weigh down an already ailing housing market, experts said.

Fortunately for all involved, the loan officer at American Home Mortgage, Jim Feely, managed to transfer the loan to First Savings Mortgage about 36 hours later. The Iversens and the sellers got the homes they wanted.

But many consumers can expect a less happy ending, said Guy Cecala, publisher of Inside Mortgage Finance Publications.

"There will be deals that fall through," Cecala said. "It's not easy to transfer a loan and all that paperwork. And it's not that easy for one lender to take the other lender's word for everything. In cases, if a lender has gone bankrupt, a lot of people won't want to touch their loans because they think there's shoddy underwriting involved."

At the greatest disadvantage are subprime borrowers, typically people with blemished credit. If their loans fall through, there are fewer lenders willing or available to accommodate them. More than half of the 25 largest subprime lenders have left the business this year, Cecala said. The firms that remain have fewer products to offer.

While bankruptcies and other lender problems can be disruptive for people taking out new loans, they have little effect on existing borrowers, who must continue making their payments to whoever manages the loans.

To increase liquidity for people with less-than-stellar credit, Freddie Mac, one of the largest investors in U.S. home mortgages, said yesterday that it plans to make a 90-day commitment to purchase what are called Alt-A mortgages, which are made to borrowers who provide less documentation about income and employment than the more-creditworthy prime borrowers.

The lenders' preference for people with great credit, high income and cash in the bank is simply "the way of the lending world these days," said Matt Zaborsky, a mortgage broker and president of NORMortgage in Maryland. "The cream of the crop, the well-heeled borrower is going to have less trouble getting what they want."

In fact, the existing lenders are now chasing the prime borrowers the others have left behind.

That was what First Savings had in mind when it took on the Iversen loan. Larry Pratt, the McLean mortgage bank's president and chief executive, said his institution has accepted about two dozen similar loan transfers in the past 10 days.

To avoid the high drama that the Iversens endured, Pratt advises home buyers to move quickly. "All consumers who are purchasing a house should write a real short settlement date into their contracts. Two weeks is reasonable," he said. "That's just the best way to protect themselves from the volatility and quick changes in this market."

That's because even people with great credit may find that a new lender that picks up their loan may not grant the same favorable terms, said Jeanette R. Binstock, a mortgage broker and owner of Mortgage Network in Rockville. Binstock cites a client who lost his loan after a lender closed shop and ended up with a loan at a higher rate.

"What I'm telling people is that they should not shop around for the lowest rate necessarily," Binstock said. "Go with the lender who you think is going to be there in the end."