Saturday, July 10, 2010
An AP article from July 10, 2010
Dennis Davis has a nearly perfect credit score, equity in his home, considerable savings and a solid pension plan. But Mr. Davis recently found that his lender didn't want to refinance his mortgage.
The problem? Mr. Davis's income-tax return showed he had taken a loss on an investment he made in a small, family-owned business. That was enough to raise doubts about his otherwise strong financial condition.
Three years after the onset of the mortgage crisis, lenders continue to tighten credit standards. The initial moves were a natural reaction for a business badly burned by rising delinquencies and defaults. But conditions are now so tight that lenders are frustrating borrowers who have enviable financial situations but still can't easily satisfy lenders' rigid checklists.
"The pendulum may have swung too far the other way," Scott Anderson, a senior economist at Wells Fargo Securities, said in a report last month.
Some analysts thought that by this point in the business cycle, lenders would have started to relax credit conditions slightly after clamping down on the risky bubble-era practices. Instead, the screws are still tightening.
That is partly because lenders are taking every precaution to avoid being forced to buy back loans from mortgage investors Fannie Mae and Freddie Mac in the event of default. When a borrower defaults, Fannie and Freddie typically buy the loan out of the mortgage-security pool and pursue a workout or foreclosure. But they can force lenders to repurchase loans when they find flaws in the way they were underwritten. Repurchases were a minor nuisance when defaults were low but have escalated over the past year.
Fannie and Freddie have already tightened their standards: Borrowers with credit scores above 720 accounted for 85% of all loans purchased by Fannie and Freddie last year. But banks are being even more stringent to prevent repurchases and want several years of pay stubs, tax returns and other paperwork from potential borrowers.
During the first quarter of this year, Freddie kicked $1.3 billion in loans back to lenders, up from $800 million during the year-earlier period. At Fannie, repurchase requests jumped to $1.8 billion from $1.1 billion one year earlier.
To be sure, the government has taken steps to keep mortgage spigots open. The Federal Housing Administration allows down payments as low as 3.5%.
Weitz- This FHA loan program is a problem in my opinion. So it was reckless to have zero down loans, but 3.5% down is perfectly fine?...seems contradictory. Its a case of government trying to prop up home values, but at what cost? Some would argue it will simply delay the unwinding process of excessive credit from our society.
Borrowers who have received standard paychecks and have uncomplicated finances generally aren't getting tripped up. But others face hurdles. Self-employed borrowers, for example, document their incomes with tax returns that include business-related write-offs, which might understate their cash flow.
He hoped to lower his interest rate to less than 5% from the current 6% through a refinancing. But his mortgage broker, Steve Walsh of Scout Mortgage in Scottsdale, Ariz., said SunTrust Banks Inc. turned down the application, citing the investment-related loss, which Mr. Davis saw as a minor setback rather than a threat to his financial health. SunTrust said it doesn't comment on individual borrowers' situations.
Rather than continuing to shop around for a refinancing, Mr. Davis has decided to cash in some of his investments and pay off the mortgage.
People with complicated financial situations can still find some willing lenders, but "it takes more persistence than most people want to put forth," said Brian Berg, a loan officer at Priority Financial Network, a Calabasas, Calif., mortgage firm.
Recently, Mr. Berg arranged a refinancing for a borrower with a very high credit score and lots of home equity and debt payments totaling just 19% of pretax income. But Mr. Berg said the lender was worried about a credit report showing a $14 missed payment to a credit-card company in 2001. The lender insisted on proof the money had been paid, which Mr. Berg said was impossible to get.
"Who cares?" he said. "It's nine years ago, and it's $14." He appeased the lender by having the borrower write a $14 check, though no one knew where to send it.
Pete Ogilvie, a mortgage broker in Santa Cruz, Calif., hasn't found a bank that will refinance a $250,000 loan on a $1 million property for a borrower with more than $200,000 a year in income and a high credit score. Banks balked because the borrower, a technology executive, was out of work for nearly a year starting in 2008. "We're going to see that for an awful lot of people whose business disappeared unless the banks learn some flexibility," said Mr. Ogilvie.
Fannie put into effect a "loan-quality initiative" that requires more borrower information to ensure that Fannie ends up buying the same loan that it originally agreed to purchase. The effort has led lenders to pull a second credit report before a loan closes, and brokers say consumers should be very careful not to run up credit-card bills before closing on a mortgage.
"If there are inquiries on your report that you're shopping for a car, that's something that has to be answered for," said Dan Green, a Cincinnati broker. "It can delay a closing and, in some cases, it'll kill a closing."
WEITZ- Long term, this is a good thing that lenders are tightening standards. I would love to see 20% required down payment again. The real story here is the big picture that must be looked at...if banks were confident prices were going to start rising, I would imagine that they would be more inclined to issue loans as that is obviously how they make their profits. In my opinion, the lending standards issued by banks shows that they are uncertain as to where prices are headed.
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