Potential homebuyers hit mortgage brick wall
Even good buyers are being shut out of home loans by nervous bankers and stricter government requirements. No one knows when this 'mortgage drought' will end. But the market forces that concern bankers don't bode well.
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Banks are awash with money. But you can't get a mortgage loan. How crazy is that?
If you've been rejected for a loan, you're in good company. Lenders are rebuffing nearly a third of the people who apply for money to buy a home, the Mortgage Bankers Association says. It's worse if you're refinancing: Nearly half of all applicants are turned away.
We talked with experts about what's behind the mortgage drought and how long it's likely to last. If you hope to buy or sell a home or refinance into historically low mortgage rates, it's a good idea to understand the market.
The drought in homeowner credit is bad, says Matthew Kover, manager of the mortgage-loan division at Port Orchard, Wash.-based Kitsap Bank, with 20 branches in communities west of Seattle.
"I turn away solidly 50% of the loans I originate," he says. That means that of all the applications he tries to get through the approval process, only half become loans. It doesn't include all the would-be borrowers he sends home to polish their credit scores and beef up their applications.
After the circus
At first, Kover says, he welcomed a return to conservative lending principles after seeing prudent requirements practically tossed out the window in the mortgage bubble. But he says the restrictions have gone too far.
"I'm continually making excuses to customers for regulations that really don't have any justification," he says.
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Banks and the federal government have tightened lending requirements. Each blames the other for the difficulties consumers have getting financing. It's all a reaction to the big mortgage circus a few years back, when government regulators were lax, banks were handing out easy money and borrowers racked up debts they couldn't pay.
The riskiest loans, made from 2004 to 2007, still haunt banks: The federal government now owns many of them and is forcing banks to buy some back.
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The effects reverberate on Main Street. Government supervisors have lenders under a microscope.
"People with FICO scores under 700, which is still good credit, are getting cut from the market because the government is being so tough on the banks over mortgages that went bad. And the banks are like, 'I'm not going to loan to these people anymore,'" says Paul Miller, mortgage analyst with FBR Capital Markets & Co.
Banks don't have to follow those strict government requirements. But Fannie Mae and Freddie Mac buy 56% of all mortgages in the U.S., which means banks can keep the fees and billing work yet use the money again to make more mortgages. So they abide by government rules.
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Although they're complaining about burdensome government requirements, lenders are piling on their own restrictive requirements for borrowers, called "overlays." If government rules make it difficult for borrowers, bank overlays can make it nearly impossible, Kover says.
For example, the government's minimum FICO score for mortgage insured by the Federal Housing Administration is 500, with 10% down. With a credit score of 580, you can be eligible for a mortgage with as little as 3.5% down. That's just the starting place, not a guarantee you'll get a loan.
In reality, many lenders won't consider applications with scores below 640. The average FHA borrower today has a 700, according to the Mortgage Bankers Association.
That keeps would-be homeowners such as Jydia Scott, 34, and her husband, Sammie, 33, on the housing-market sidelines. The Scotts and their four children have lived with relatives in Riverdale, Ill., south of Chicago, for three years. They can't quite qualify for a loan, says their agent, Dona Crane of Keller Williams Preferred Realty.
Jydia Scott, who's watched prices fall from $120,000 to $40,000 or $50,000, has her eye on the perfect $54,000, four-bedroom fixer-upper. She could buy it with $1,000 down, she says. "We would love to be able to jump in and take advantage of it."
Their paychecks would support the payments, but the hang-up is their credit scores: His is 590, hers is 563.
"They told us we needed to be at least at a 620, and they could work with us," she says.
Piling on rules
Kover, of Kitsap Bank, combs through large lenders' offerings to find the best features and prices for his customers. These days, it's difficult, even for borrowers with 700 FICO scores. "An individual can still qualify for a loan with a score below 700, but the rates are usurious," he says.
The requirements for a "conventional" loan, the kind with the lowest interest rates and strictest government guidelines, are even higher. The minimum FICO score is 620, but in practice, 755 is the average borrower's score, a Freddie Mac spokesman says. In 2001, it was 718.
Your credit score is only one piece of your loan application. The entire package — your debt, your history of managing credit, your income, your credit score and the property itself — has to qualify. The cheapest loans go to squeaky-clean borrowers. With previous credit problems, even if you do qualify, you'll have fewer choices and pay a higher rate.
Lenders also are tightening rules for down payments. Kover says that it has been his experience that one major lender, for example, has stopped lending to anyone with a credit score below 740 — a respectable number — without a 20% down payment.
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"Any number of mortgage-insurance providers are willing to underwrite and insure a 5% down-payment loan with credit scores below 740. But (that lender) says, 'No,'" Kover says.
James Barth, senior finance fellow at The Milken Institute and an expert on U.S. mortgage markets, says, "Banks are saying, 'Why should we lend the way we did a few years ago? It got us into trouble.' They're unsure about where the housing markets are headed. So they just lend to the less-risky borrower, and they're going to require higher down payments."
Banks will make money regardless because they know consumers rely on short-term credit (higher interest) like credit cards, autos, and store financing. Why make 6% when you can make 21-25%? And those bank fees...whoa!!! There's really no money in the housing business anymore so you'll see more banks exit from it altogether. For the ones that stay in it, well they will lend to their own clientele or to consumers in the top 5-10% credit range. I feel sorry for young adults today because life's gonna be so much harder than it was for me at their age...I am 43. I have a nice home (almost paid off) and a great job, but I really worry about my children. FHA loans should cut out banks altogether and do direct lending instead. Banks may cry foul, but at least it'll get people into more homes (at least the responsible homebuyers). What a mess...lol!
I have been struggling and without work for over 3 years, as has many nam vets.
feel like an old forgotten VET...let me know
But you keep it in there, because you think it's safe.
FDIC insured means you are entitled to your money if the bank folds.
However, it could and most likely will be held up in litigation for up to 7 years.
My advice is take all your money out of the banks and invest in food markets.....groceries have doubled in price since last year alone.
I don't understand what all the complaining is about. I'm 26 and just bought a house. It wasn't as horrible as everyone made it out to be. I thought the biggest hurdle was getting the loan. In reality it was dealing with the seller and our own emotions. I was smart with my money and lived with what I had. No new Ipad or Iphone for me. I want one but it isn't in the budget. We cut out all the excess and managed to save up 20% plus closing costs and a nice nest egg for emergencies. The bank saw we were smart with our money and no questions were asked.
Everyone blames the problems on Obama and the banks. In reality it is everyone's fault for what happened. The government and banks were lax and people were stupid enough to leverage themselves. I've met people over the years that complained about their mortgage payments until they tell you why they were soooo high.....those lovely 2nd mortgages really come back to bite you in the a$$. I feel sorry for those that lost their jobs and everything with it but you know what sh#t happens. We just paid $2.5K in unexpected plumbing repairs and are looking at several thousands in water damage repairs....you see me complaining? Nope! That is life and you gotta take the good with the bad. For now we are just hoping insurance pulls through and covers some of the repairs or we will be dipping into our emergency fund to pay for it. Oh well. Like I said sh#t happens.
Although the battle in Washington D.C. over taxes rages on, a silent but deadly tax increase has already been in effect throughout the Obama Administration.
Millions of homeowners who have an adjustable rate mortgage or hybrid mortgage that featured a fixed rate for five years and then switched to adjustable have had hundreds or thousands of dollars sucked out of their personal cash flow.
Ironically, there is no new tax law that was passed that caused this to happen.
Rather, the root cause of the tax hike is low interest rates and their negative impact on the mortgage interest tax deduction. Read more at daily dollar newsletter dot com in the mortgage section.
We should have never bailed out any banks.We shold have let them go bankrupt just like anybody else who drives a buisnes into the ground...
This is economic segergation. People can work their butts off and establishment will never let them get ahead. Yeah bad loans were made years ago but huge commissions were also made and the bubble the burst which everybody tallks about were in the end the investors buying and flipping the properties and making huge profits in some cases buying pre-construction and closing and selling on the same day. The last ones in got holding the bag. No more fools to pay over inflated home prices.
This was no more then a giant ponzi scheme and then our own governmet bailed out the banks with our own money and now the very banks and lenders that were bailed out with our money won't make loans. People are going to have to the same or more then a mortagae in rent making landlords and bank owned rental properties rich. Economic segregation. Unless you can get ahead and save enough so you won't have to have a mortage you will be stuck. What have we allowed to happen?
(ldb13) Don't forget that little 700 million dollar bailout that me and you are paying for.Also all those nice multi million dollar bonuses they give themselves..Remember banksters never loose,EVER!!!!