Banks Tighten Rules on Traditional Mortgages

The surge in home-loan delinquencies has so far been limited mostly to people with weaker credit histories. But concern that delinquencies might spill into the traditional mortgage market has banks tightening lending practices.

RENEE MONTAGNE, host:

The easy money in the nation's housing market is drying up. As home prices have leveled off in much of the country, lenders are getting more cautious about the kinds of loans they'll make, especially to borrowers with less than perfect credit.

NPR's Scott Horsley reports.

SCOTT HORSLEY: For the last few years, the mortgage market has been enjoying a wild party, where everyone was welcomed and the money flowed like cheap beer. As often happens at that kind of party, things got a little out of hand, and now the hosts are turning down the music. Mortgage broker Joseph Bedics, of Su Casa Mortgage in San Diego, says the atmosphere has changed from a year or two ago, when practically anyone with a pulse could get a home loan, no questions asked.

Mr. JOSEPH BEDICS (Mortgage Broker, Su Casa Mortgage, San Diego): All they had to do was breathe underneath the mirror, and if it got a little cloudy, they got the loan. But that has all changed. Now they're checking assets. They're verifying income - where before they didn't care.

SCOTT HORSLEY: What's thrown cold water on the party, is that home prices in much of the country, are no longer climbing at a double digit pace. Home prices actually fell in the fourth quarter in about half the nation's cities. Bedics notes, here in San Diego, prices dipped about five percent.

Mr. BEDICS: A lot of people owe more money on the home than the value of the home. The ATM machine that had been installed in everybody's home has now been removed.

HORSLEY: Falling home prices cut into borrowers' equity, and many of those who bought in recent years didn't have a lot of equity to start with. According to the California Association of Realtors, one in five homebuyers in the state last year, put no money down. Bedics says those buyers are the most likely to default on their loans, if times get tough.

Mr. BEDICS: When the borrower owns 50 percent or 25 percent of that home, it's little bit difficult to walk away. But when you don't own a brick - walk away.

HORSLEY: The rising number of defaults has spooked Wall Street investors who bankroll many home loans. So after years of helping to provide easy credit, Wall Street is now cracking down. As a result, several so-called sub-prime lenders, that make loans to customers with bad credit, have gone bankrupt. Others, like San Diego's Accredited Home Lenders, are tightening standards, requiring more proof that borrowers can repay their loans and cutting back on second mortgages, which are used in lieu of a down payment.

Accredited President Joe Lydon told a conference call last week, credit quality is now his number one priority. But, Lydon says, not all sub-prime lenders are ready to take that approach.

Mr. JOE LYDON (President, Accredited Home Lenders): There are plenty of loans that we're declining on a daily basis, that are getting funded. Unless the entire market moves the way it should, there will be plenty of additional blood flowing in the streets.

HORSLEY: So far, the blood has been limited to the sub-prime market. But analyst Andy Laperriere, of the research firm International Strategy and Investment, warns even some borrowers with good credit have a similar risk of default. Some of those borrowers have loans with low introductory teaser rates and their monthly payments could jump sharply over the next few years.

Mr. ANDY LAPERRIERE (Analyst, International Strategy and Investment Group): And if they can't refinance, and if they can't sell the house at a profit, they're going to have to be able to afford that higher payment. And I think that the unfortunate fact is that a lot of people are going to have a very hard to time repaying the loan.

HORSLEY: Many observers see the tightening of credit standards as a necessary correction. But it could mean fewer buyers qualify for loans in a housing market that's already sluggish.

Scott Horsley, NPR News, San Diego.

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