Even gold-plated applicants must justify the smallest quirks in their finances in excruciating detail. And processing mortgage applications can take months.
Homes under construction in Beaumont in Riverside County.
March 7, 2013, 8:55 p.m.
Nearly half of all California households can now afford the median-priced home in the state — but that’s no help if they can’t get mortgages.
Six years after the subprime mortgage meltdown, banks remain tight-fisted, even with solid borrowers — a fact they attribute to shifts in government regulation and demands that they buy back bad loans. Mortgage credit has not eased much since 2007, according to Federal Reserve surveys of loan officers, even while low rates and the housing recovery have borrowers lined up seeking financing.
First-time buyers and the self-employed must jump through especially complex hoops. Even gold-plated applicants must justify the smallest quirks in their finances in excruciating detail. And processing applications can take months.
An unpaid $8 utility bill nearly derailed Sam Dogen’s bid for a refinancing. He had already waited 80 days with increasing frustration when he got an urgent call from his bank officer.
“We can’t go through with this,” he recalled the officer saying. “Your credit score came back at 680.”
Dogen was floored. He’s an investment banker and personal finance blogger who owned three other homes and had savings of nearly $1 million. It turned out that two of the big credit-rating firms still scored him at 790, but the third had whacked him over an $8 electric bill that a former tenant had left unpaid two years earlier — a debt he said the utility hadn’t told him about.
Dogen, who operates the Financial Samurai website, said it took a series of angry phone calls and nearly three more weeks to straighten things out with Pacific Gas & Electric and Citibank and finally get the deal done.
All this marks a reversal from 2006, when the California Assn. of Realtors said just 12% of households could afford the median-priced home in the state, but seemingly anyone could get a mortgage to buy one. The turnabout highlights a cruel fact of the housing crash: Many who were crushed by lost home values — or other economic pain related to the housing meltdown — may now miss out on record low prices and interest rates if they want to buy again.
“We’ve been saying the same thing in the business for the past five or six years: If you can qualify for a loan, you don’t need one,” said Dave Emerson, a longtime Lakewood real estate broker. “The banks are still doing what they’ve always done — swinging from one extreme to another.”
Lenders say their caution stems in part from uncertainty over a tougher new regulatory environment, along with unrelenting demands from government-sponsored mortgage buyers that the banks repurchase soured loans. Bank of America Corp. last year stopped doing any new business with Fannie Mae, the largest loan buyer, saying its buyback demands had become unprecedented in scope. The bank reached a $10-billion settlement with Fannie over the claims in January.
Complaints about tight-fisted lenders have emanated not just from potential buyers and industry sources, but from Federal Reserve Chairman Ben S. Bernanke, who at least twice in the last year has remarked on how the pendulum has swung too far.
“Overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery,” Bernanke said in November.
There is no indication that things have improved since those comments.
“Respondents reported little change in their standards,” the Fed said in its latest survey of loan officers, issued last month, adding: “Demand for prime residential mortgage loans had reportedly increased over the past three months.”
The grim availability situation contrasts with a shining affordability picture. For the nation as a whole, two-thirds make enough to afford payments on the median-priced house, compared with about 40% in 2006, said Kenneth T. Rosen, chairman of UC Berkeley’s Fisher Center for Real Estate & Urban Economics.
The rub is getting a mortgage financed with help from Uncle Sam. Housing finance giants Fannie Mae and Freddie Mac, seized by the government in 2008, backed nearly two-thirds of last year’s mortgages. An additional 20% were insured by the Federal Housing Administration, the U.S. Department of Veterans Affairs or rural housing programs, according to Inside Mortgage Finance.
Credit scores, which range from 300 to 850, are a key factor. An often-applied standard before the housing crisis pegged a subprime score at less than 620, with 720 considered excellent. But the bar has since moved higher.
At Freddie Mac and Fannie Mae, which control the lion’s share of the government-backed loans, the average credit score has risen to more than 760 in recent years from about 720 in 2007, Rosen said at a housing conference in Oakland last month.
Meanwhile, the FHA, a traditional insurer of loans to first-time and lower-income borrowers, has been raising its insurance fees and tightening credit standards. The moves are required to stay solvent after stepping in to support the housing markets after the bust. Borrowers with scores lower than 620 have made up just 2% of loans this year, compared with nearly half in 2007.
So who can get a loan?
Salaried professionals with scores in the high 700s have the best shot, along with borrowers who have never missed a payment and want to refinance, said George Duarte, a Fremont mortgage broker.
But even these borrowers may face stiff documentation demands, including having to explain any bank deposit other than a regular paycheck. Duarte said a lender challenged one of his San Francisco Bay Area clients because her application didn’t mention a previous home she owned in Twentynine Palms, in the Southern California desert.
The woman lived in the home from 1979 through 1985, rented it out for two years and sold it in 1987. She no longer had any documents showing her buying or selling it — a fact that had caused no problems during two previous refinancings of her current home.
“She wanted to know why they were pestering her about something that happened 25 years ago,” Duarte said.
John and Peggy Broad of Orange, who had credit scores higher than 800, wanted to refinance a home loan and a home equity credit line into a new first mortgage of $144,000. They thought it would be easy, since the new loan would be a small fraction of the home’s $490,000 appraised value.
Yet lenders seemed almost indifferent to the fact that John Broad’s income from a medical products test lab was 10 times more than the new payment would be at 3.5% interest. “I’ve never been asked so many little details about my life,” said Broad, 60.
The refinance closed in November after more than two months, delayed in part because the lender, like others, was besieged with applications to refinance loans, said Broad’s mortgage broker, Rick Cirelli of RTC Mortgage Corp. in Laguna Beach.
“It was in underwriting for 22 days,” Cirelli said. “More normal times are less than one week.”
Despite the problems, there have been some improvements since the mortgage market seized up during the financial crisis. For instance, refinancing of certain underwater mortgages — those that borrowers owe more on than their homes are worth — has become more available for homeowners who have stayed current on payments under an Obama administration program that offers incentives to banks. And jumbo loans, those for more than $625,000, nearly disappeared after the crash, but now are widely available at rates less than a half a point higher than traditional loans.
Private mortgage insurance, which enables borrowers to make down payments of less than 20%, has also seen a resurgence. But it isn’t cheap: Insurance on a 97% loan to a borrower with a credit score of 700 would cost about $333 a month for a $400,000 mortgage, added on top of principal, interest and insurance for at least two years.
FHA loans remain another option for borrowers without large down payments, and some lower-income folks can take advantage of programs that provide extra cash for first-time buyers, said Connie Der Torossian, program manager at the Orange County Home Ownership Preservation Collaborative.
But trying to get a foot in the housing door in that manner has been compromised by another trend: deep-pocketed investors scooping up homes with no need for mortgages.
“An FHA loan with 3.5% down, some of that from a down-payment assistance program — and who knows how long it will take to close — can’t compete with a buyer paying all cash,” Der Torossian said.