Refinancing Mortgage Troubles: Lenders Tighten Standards

Edward Booker is one of nearly 3 million homeowners with adjustable-rate mortgages who’ve had trouble paying their bills. Like Booker, many of them won’t be able to refinance their loans once the interest rates start rising.

At that point, they’ll have to tighten their belts, sell their homes or lose them through foreclosure.

This month, the mortgage payment on Booker’s Chicago home rose $200, to about $1,300. It’ll go up again in September. He wants to mortgage refinance, but he fell behind on payments after his wife died of cancer in 2005, so no lender wants to take the risk.

“I’m just trying to hold onto my house until I can figure out something else to do,” says Booker, 58, a former rail-car inspector who’s on disability.

Since the start of the year, more lenders have been shutting their doors to people such as Booker, just as those homeowners’ interest rates are rising. They’re slashing bad credit home loan programs, known as subprime, that helped fuel the housing boom. And they’re raising the bar for homeowners and first-time buyers to qualify for new mortgages.

The trend accelerated last week after federal regulators proposed stricter guidelines for banks that make subprime ARMs. The move followed Freddie Mac’s decision to drastically raise the criteria for the subprime ARMs it would buy and to require better proof of a borrower’s finances.

The industry is reacting to the waves of subprime borrowers who’ve defaulted on their ARMs in recent months. The tighter controls should help prevent future borrowers from getting in over their heads, while protecting them from predatory home loan lenders. But the sudden shift in lending rules could also threaten the homeownership gains made by families since 2000, weaken the recovery of the housing market and potentially slow the economy.

“It will be a very severe correction (in subprime lending), and I think it will last anywhere from six to 12 months, during which many of the lenders who have operated in this market will gradually get pushed out of business,” says Chris Flanagan, a managing director for JPMorgan.

Nearly two dozen subprime lenders have already closed their doors or been purchased, and a dozen more are in trouble, according to a report by Credit Suisse.

To stem their losses, lenders nationwide are notifying mortgage brokers to cancel loan programs. Many of them are:

•Reducing loans for 100% of the purchase price.

•Reducing the number of piggyback loans, whereby a lender makes one loan for 80% of the purchase price and a second loan for the remaining 20% of the price at a higher interest rate.

•Raising the required credit score.

•Requiring more documentation of a borrower’s income and scrutinizing the appraisal and comparable-home sales data.

“Some of these companies are yanking away six, eight (loan) products at a time, and the reps are just hanging on the phone with their mouths open, saying, ‘What are we going to sell?’ ” says Dave Tucker, owner of MileHighMortgage.com in Castle Rock, Colo.

That’s partly why he can’t help Anita Furakh and Bobby Pervez this time. Tucker helped them buy their first home near Denver two years ago with an ARM that covered 100% of the $195,000 purchase price. The young couple, with two children, made their payments on time until December, when Pervez traded in his car for a new one. That month, they were late on their Colorado mortgage. The timing couldn’t have been worse.

They needed to consider mortgage refinancing before the rate started rising this month. But their home’s value hasn’t gone up, and their credit score has gone down.

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