The Housing Chronicles Blog: Lenders restrict lending in 25% of country's zip codes

Thursday, March 20, 2008

Lenders restrict lending in 25% of country's zip codes

Reverting to standards last seen 20 years ago, lenders and private mortgage insurers have flagged about 25 percent of the country's zip codes as ineligible for loans on properties with less than 3% down payments as well as any investment properties, second homes or purchases made with adjustable rate loans. From an AP story via MSNBC:

Mortgage insurers, whose backing is required for borrowers who can’t afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation’s ZIP codes where they refuse to insure some home loans... The entire states of California, Florida, Arizona, Michigan, Ohio and Nevada — which have seen the highest foreclosure rates and the worst price declines — are blackballed on some mortgage insurers’ lists.

Banks that have lost billions because of bad bets during the housing boom are now reverting to strict lending standards not seen in nearly 20 years, according to industry data and interviews with lenders.

For new home buyers and those seeking to refinance, it can mean higher down payments and a higher bar for credit scores, among other requirements. The toughest restrictions are in markets where home prices are falling, though regions where property values are rising are not immune...

The reluctance to extend credit comes despite a flurry of government initiatives, including steady interest rate cuts by the Federal Reserve, intended to make it easier for would-be borrowers and those facing interest-rate resets on their mortgages...

In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won’t insure certain types of home loans — those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.

With banks and mortgage insurers pulling back, state and federal programs for first-time buyers and people with poor credit are attempting to fill the void...

Amid the turmoil, the mortgage industry is playing hardball with borrowers.

Wells Fargo & Co. now requires a 25 percent down payment in the most distressed markets, according to a document sent to mortgage brokers last month. A company spokesman said in an e-mail message that Wells Fargo is “focused, as we’ve always been, on fair and responsible lending and sound credit risk management.”

Some borrowers who took out home-equity loans or second mortgages are being blocked from refinancing. The problem is most common among consumers using two different lenders.

Companies that made second mortgages are now denying requests — common in a refinancing transaction — to take secondary status in the event of a foreclosure. Especially in markets where prices are declining, holders of those loans want to be paid off before a loan is refinanced rather than take on the risk of default, industry experts say.

Lenders’ changes have removed 30 to 40 percent of the borrowers who could have qualified in recent years, estimated Tom LaMalfa, managing director at Wholesale Access, a Columbia, Md.-based mortgage research firm.

Lenders and mortgage insurers are also requiring proof of income and employment, something they didn’t always do during the housing boom.

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