By Kenneth R. Harney
Saturday, August 18, 2007
The mortgage credit crunch is not only affecting interest rates that home buyers are quoted, but it is also triggering changes in less visible areas, such as minimum credit scores, location and type of properties, and even controls on who orders credit reports.
These new restrictions magnify the importance of FICO credit scores and are giving rise to lawsuits against major creditors such as American Express and Citibank.
Recent run-ups in rate quotes for jumbo mortgages -- those larger than $417,000 -- have received widespread publicity, but more subtle underwriting changes by lenders have not. Yet some of these could actually have a wider impact.
In one such shift, the traditional cutoff point between prime and subprime loans -- previously a FICO score of 620 -- has migrated upward in recent weeks. Some mortgage companies are posting 680 FICOs as the new demarcation line; others have set the break point slightly below. Webster Bank, a wholesale lender based in Connecticut, told its broker network on Aug. 7 that its minimum credit score has been increased to 680, and that's with full documentation of applicants' income and assets.
"I think the days of 620 are about over" for nonconforming mortgages that are not being originated for sale to Fannie Mae or Freddie Mac, said Bob Armbruster, chief executive of Armbruster Mortgage Services in Lawrenceville, Ga. "Investors are just too afraid to take the risk anymore."
Mark Teteris, chairman and chief executive of Lakeland Mortgage in Bloomington, Minn., said, "We see this every day now: investor e-mails telling us the minimum FICO for certain loans we want to see is 700" -- or higher for low-documentation applications.
Other lenders have bumped up minimum scores for fully documented loans more modestly, to 640 from 620; still others are requiring 720 FICOs as the minimum for limited-documentation applications.
The upward squeeze on FICOs is putting a new premium on raising home buyers' numbers and obtaining correct scores, based on full reporting of credit data, mortgage and credit-market experts said. It's also triggering suits against lenders and credit card companies over their credit-reporting practices.
A class-action suit filed in March in U.S. District Court for the Southern District of Florida charged that American Express and Citibank are depressing large numbers of clients' scores by withholding credit account limits from Equifax, Experian and TransUnion, the three dominant credit bureaus. Without credit limits or account maximums, the plaintiffs say, the FICO software often penalizes the borrower.
Neither card company would comment on the litigation. However, American Express said its green- and gold-card holders do not have "preset spending limits," and therefore there is no credit limit to report. American Express spokeswoman Molly Faust also said that the latest FICO model "differentiates between charge cards and credit cards" and that FICO scores are not artificially depressed.
Samuel Wang, a Citibank spokesman, confirmed that "certain cards" come with no preset limits, so limits cannot be reported to the bureaus.
Besides FICO scores, other key underwriting factors under pressure include:
· Loan-to-value ratios and combined loan-to-value ratios (CLTVs). Some lenders are abandoning zero-down-payment programs; others are requiring 10 percent minimum equity stakes. Some are restricting maximum CLTVs to 80 or 85 percent when a second mortgage or credit line is proposed on a home that has a first mortgage.
· Financial reserves. Rather than a minimum of two months' worth of loan payments verified as on deposit in a bank, some lenders now want to see six months' worth for certain loan categories.
· Restrictions on credit reports and appraisals. One lender says it will look at only those credit reports it has ordered from its own vendors, presumably an anti-fraud measure. Another wants only the freshest "comparables" for appraisals backing loan requests -- properties sold within the past three to six months, plus detailed information on asking prices of similar houses for sale.
· Restrictions on locations and minimum loan sizes."We're beginning to see tightening in areas where delinquency rates are high," as well as growing unwillingness to fund smaller mortgages, generally under $100,000," said Carl Delmont, chief executive of Freedmont Mortgage in Hunt Valley, Md.
Could the unfolding credit crunch create updated forms of quasi-redlining by lenders, in which categories of borrowers, loan types, credit profiles and locations suddenly are shunned or priced out of reach?
In that event, could buyers of second homes, non-owner-occupied properties, high-rise condos and central-city rowhouses -- or people with minimal bank reserves, depressed FICO scores or the wrong ZIP code -- face rougher times in the mortgage meat grinder?
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.