In recent weeks, mortgages quietly became harder to get. Mortgage insurers require higher credit scores and bigger down payments than they did a month or two ago. Underwriting software used by brokers and loan officers is issuing fewer approvals than at the end of May.
Most buyers can still get home loans, but some find themselves pushed out of the private mortgage insurance, or PMI, market. Instead, they have to get mortgage insurance through the Federal Housing Administration. That often entails having to switch mortgage brokers, because many don't have FHA certification.
The upshot: Although mortgages have become harder to get, they're not impossible to get. Borrowers must document income and assets, bring a down payment (or have equity) and have enough flexibility to change lenders to get an FHA-insured mortgage. It helps to have a high credit score.
Bob Moulton, president of Americana Mortgage of Manhasset, N.Y., has a client who wanted a jumbo, interest-only mortgage. Moulton tried to get the client a loan through Astoria Federal Savings, which required a credit score of 740. That's a high hurdle in the mortgage world, and Moulton's client couldn't qualify because he had a credit score of 672.
"And it's a full income check," Moulton laments. He adds that two years ago, borrowers could get loans if they fogged a mirror, and "now they give you a full medical exam."
Michael Moskowitz, president of Equity Now, a mortgage lender based in New York City, recalls a recent phone conversation he had with someone from a big rival bank. "It was like they were in self-preservation mode," Moskowitz says, with loan programs being pulled back and lending guidelines becoming more conservative.
Caution takes over
Lenders were bound to become more cautious, because they were so reckless during the boom years of 2003 through the beginning of 2007. Their carelessness is yielding an ever-rising tide of delinquencies and foreclosures, made worse by falling home values.
In the final months of 2007, it became clear that home values were falling in many markets across the country. Mortgage giants Fannie Mae and Freddie Mac, which set guidelines for standardized mortgages, announced that they would enforce a "declining markets" policy that requires higher down payments for loans where house prices are falling.
Hardball with software
Borrowers and lenders complained that the policy was scuttling deals. In May, Fannie Mae announced that it would rescind the rule June 1. That happened to be the same date Fannie rolled out the newest version of its loan decision-making software, Desktop Underwriter. It wasn't a coincidence. A Fannie spokeswoman explained that the company could ditch the declining-market policy because the new loan software "will limit risk layering and assess each loan more precisely."
And what does that mean? Stephen Swad, Fannie's chief financial officer, told analysts in May that, "We have significantly tightened underwriting and eligibility standards." In a memo, Fannie told lenders to expect the new software to reduce approval rates.
Because of Fannie's stricter standards, conforming lenders will require credit scores of at least 580. Borrowers won't be able to boost their scores by being listed as "authorized users" of credit cards owned by other people. Anyone who has been 60 days late on a mortgage payment in the last 12 months will be turned down; ditto for anyone who went through foreclosure within the last five years. And the new guidelines cast a wary eye on anyone who is buying a condominium or wants to do a cash-out refinance.
"If it seems like a long list, that's because it is," mortgage lender Dan Green wrote in his blog. "Homebuyers hit by the changes may be subject to higher mortgage rates, higher loan fees or an outright denial on their application."
Insurers even more strict
That's just the lender side of the equation. Mortgage insurers have a say in who gets a loan, and they have become strict in recent weeks and months. They require higher credit scores for loans in declining markets, and the list of declining markets continues to grow.
Take Mortgage Guaranty Insurance Corp. In March, MGIC required a 620 credit score to insure a loan in a restricted market. Now it requires a 680 score. And an already large list of restricted markets grew with the addition of much of Connecticut and Rhode Island, and of the entire states of Michigan and New Jersey.
MGIC won't insure a mortgage on a condo or any vacation home in Florida. Other mortgage insurers, such as Genworth, avoid underwriting policies on second homes in Florida, too, which means that buyers have to come up with down payments of at least 20 percent.
"You need to make sure that you go back to basics," says Michael Zimmerman, head of mortgage banking strategies for MGIC, citing the "3 Cs" of lending: the borrower's credit, collateral and capacity to repay. "Our guideline changes are focused not only on home prices, but also risk characteristics."
FHA's the last resort
Zimmerman adds that borrowers with down payments of less than 20 percent do have another place to go for mortgage insurance: the FHA. It's probably no coincidence that in July, the FHA will begin taking credit scores into account -- something it had never done before. Instead of charging every borrower the same rate, the FHA will charge more to riskier borrowers.
The FHA changes "won't make it necessarily tougher to qualify," says Matt Hackett, underwriting manager for Equity Now. "It'll make it more expensive for the higher-risk loans."