Tighter Mortgage Lending Climate Shuns Bad Credit

Rising interest rates and dropping home prices have squeezed a market that had been propped up by risky home loans and easy credit during the housing boom.

As mortgage bills came due, the rates of home mortgage foreclosures rose, and the easy credit dried up for many American families.

“Now we’re stuck in the apartment,” said Chris Shields, 31, a firefighter who lives in Manifee, Calif., and whose wife gave birth to baby Gabriella at the end of March, and who’s running out of space without options for a house.

These mortgages, also called “subprime” or “bad credit home loans” opened up homeownership to people who otherwise couldn’t buy houses because they had weak credit or little money for a down payment.

Unlike traditional 30-year fixed mortgages, these home mortgage loans are often adjustable, and payments grow with rising interest rates.

The non-traditional loans allowed homeowners to borrow large amounts thanks to low a initial “teaser rate,” piggyback loans split into second mortgages, or interest-only payments.

In the past, mortgage lenders didn’t want to give a home mortgage to somebody with below-average credit because it was risky, said Kathe Newman, a professor at Rutgers University who has studied the subprime market and foreclosures.

But the explosion of a secondary market for repurchasing mortgages provided more cash to lenders, and investors were willing to take bigger risks.

Technology, such as automated credit scoring, also allowed a home loan lender to more quickly assess risk, she said.

This year, the volume of subprime mortgages is expected to drop by about 30 percent, said Jay Brinkmann, vice president of research and an economist for the Mortgage Bankers Association in Washington, D.C.

Over the last few months, Louis Allee, a mortgage broker based in Whittier, Calif., said he has seen fewer clients qualify for 100 percent California mortgage loan financing.

More potential home buyers also are having to prove their incomes, and they must show they have the equivalent of several months’ mortgage payments in their savings account.

LaVerne Jackson, who sells homes for Century 21 south of Newark, N.J., said the mortgage situation is slowing her business.

In early March, one of her clients was set to close on a $320,000, four-bedroom home in Linden, near Newark Liberty International Airport.

But the deal was canceled abruptly just hours prior to closing when the buyer’s mortgage company shut its doors. Jackson said that the housing market will suffer as buyers work to establish better credit.

“They will have to do a lot of credit repairs before they can qualify,” Jackson said. “It also means the houses will sit a little longer.”

The month before, the state also barred New Century Financial Corp., which pulled funding for 59 home mortgage loans and eight with the company’s Home123 Corp. unit that had already closed.

The home loans have since been placed with other mortgage lenders.

Irvine, Calif.-based New Century had taken an additional 451 applications that did not close and Home123 had 293, and they have been directed to other mortgage companies.

The shakeout of the real estate market could have positive benefits, some housing advocates say. Ira Rheingold, executive director of the National Association of Consumer Advocates, said people won’t (and shouldn’t) qualify for a home loan they can’t afford.

“People will have the chance to buy homes they can sustain, not the absurdities we’ve been seeing,” he said. “What’s going to happen is only good for homeowners and consumers.”

Some people who got into trouble with loans they couldn’t afford have since applied for mortgage refinancing to obtain better rates.

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