Bad Credit Mortgage Collapse Hurts First-Time Buyers
In eight years as a senior loan officer, Josh Tullis rarely felt compelled to reject a first-time home buyer’s home loan application.
He’s saying “no” plenty in 2007.
Tullis’ latest clients are a married couple banks ought to love. Between them they make $70,000 a year and they’ve been renting the same apartment for three years with zero late payments.
But a mortgage lender doesn’t love them because they have no money in the bank, said Tullis, Virginia sales director at A. Anderson Scott Mortgage Group in Falls Church.
With mortgage companies cracking down due to rising bad credit home loan defaults, Tullis needs them to sock away two months of payments for the $500,000 townhouse in Fairfax.
“Six months ago, these folks might have qualified, a year ago, definitely,” Tullis said. “It’s a lot, lot harder than it used to be for first-time home buyers.”
America’s bad credit mortgage lenders have tightened credit guidelines so much they’re squeezing about 500,000 first-time buyers out of the market, according to the National Association of Home Builders.
A decline of that magnitude would reduce sales of new homes by 4 percent and sales of existing homes by 7 percent, and deepen the worst housing slump since the Great Depression.
Shares of home builders, including Toll Brothers Inc., fell more than 6 percent in the past year, while shares of apartment owners such as Sam Zell’s Equity Residential advanced more than 10 percent as potential homebuyers keep writing monthly rent checks.
Tishman Speyer Properties LP and Lehman Brothers Holdings Inc., both based in New York, agreed last month to buy Englewood, Colorado-based Archstone-Smith Trust, the second- biggest U.S. apartment owner, for $13.5 billion.
About 2.5 million people will buy homes for the first time this year, down from 3 million in 2005, said Gopal Ahluwalia, staff vice president for research at the National Association of Home Builders in Washington.
“The impact will be negative for overall demand and keep the housing market in the correction phase for longer than it would have,” said Celia Chen, director of housing economics at Moody’s Economy.com.
A lack of buyers means fewer sales even in neighborhoods where there are few if any bad credit home loan borrowers, affecting firms such as Toll Brothers, the largest U.S. builder of luxury homes.
Fewer than 2 percent of Toll’s customers are subprime borrowers, said Chief Executive Officer Robert Toll. Still, the company is feeling the effect of tighter money, he said in a conference call last month.
“It appears that the impact of stricter mortgage lending standards, arising from the problems in the subprime market, is negatively affecting affordability at lower price points,” Toll said.
“This in turn can and probably does impact the entire housing food chain including some of our potential customers’ ability to sell their existing homes.”
Tightened home mortgage lending was a factor that “may have served to impede the hopes of a rebound we had started to see in early February,” added Toll.
The biggest losers are home builders that cater to first-time buyers. Shares of Ryland Group Inc. in Calabasas, California, declined 24 percent this year; Centex Corp. of Dallas fell 22 percent; Fort Worth, Texas-based D.R. Horton Inc., the largest homebuilder by market value, dropped 20 percent.
First-time buyers fortified with easy access to credit bought an estimated 26 percent, or about 322,000, of newly built homes in 2005, according to an analysis of data from the American Housing Survey of the U.S. Census Bureau.
That year they also purchased about 40 percent, or 2.72 million, of existing homes, according to the National Association of Realtors.
The closing or sale of more than 50 mortgage companies and stricter credit rules will reduce subprime lending to $350 billion this year, a 47 percent drop from the $665 billion that the industry lent in 2005, according to Seattle-based Washington Mutual Inc., the largest U.S. savings and loan.
“There’s no question borrowers had an easier time six months ago than they do right now,” said Chris Hutchens, a North Carolina home loan officer with Alpha Mortgage Corp. in Wilmington, N.C.
About 20 percent of U.S. mortgages issued last year were bad credit home loans to borrowers with a bad or limited credit history. One of every four subprime home purchase loan applicants the last two years was a first-time buyer.
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