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Jittery lenders raise rates

Conservative practices return to mortgage market.

By HELEN HUNTLEY Times Staff Writer
Published August 4, 2007

Two months ago, with enough money for a 10 percent down payment, Satyajit Bhuyan approached Bank of America for a mortgage.

The software consultant had all his paperwork in order, except for a $1,800 hiccup. A 2001 unresolved payment for an outpatient procedure at a Tampa hospital emerged like a ghost from the past, temporarily blocking his entry into his four-bedroom Tampa Palms home.

"It was so long ago, it should have gone away," Bhuyan said. "They (Bank of America) seemed quite careful about what they were doing and made me pay the amount and get the issue resolved with the hospital."

Bhuyan smiled his way into his new home with a 6.5 percent interest loan. Others may not be that lucky.

Jittery home-mortgage lenders are cutting off credit or raising interest rates for a growing portion of Americans, extending well beyond the market for subprime loans for people with the weakest credit records.

"In the past half-dozen years, if you could fog a mirror, you could get a loan," said Greg McBride, senior financial analyst at Bankrate.com in North Palm Beach. "Now we're starting to see that a lot of those loans that were made probably shouldn't have been made. Investors and lenders are taking a more conservative stance."

A worsening credit crunch threatens to put further pressure on the struggling housing market, where prices are flat to declining in much of the country. The impact can be felt in the Tampa Bay area, where home sales are off nearly 50 percent year over year and housing values have slipped 10 percent or more in many areas.

The short-term pain is that it shuts potential buyers out of the market, McBride said. "The long-term gain is that the delinquencies and foreclosure we're seeing now won't continue in the years to come," he added.

Lenders say what's making them run the fine-tooth comb on loan applications is the disappearing appetite of mortgage-bond investors for risky mortgages. That includes those dubbed "Alt-A," a category between prime and subprime that often involves borrowers who don't fully document their income or assets, or those buying investment properties. Lenders are tightening standards and "raising rates like crazy," said Melissa Cohn, chief executive of Manhattan Mortgage, a New York mortgage broker.

Seeking to soothe the market, Countrywide Financial Corp., the nation's largest home lender, said it had plenty of funds available to weather the industry's troubles.

But the fright among investors is forcing lenders to go back to more conservative practices that were the norm before the housing boom of the first half of this decade. Many now are focusing on loans to borrowers who are willing to document their income, can make a down payment of at least 5 percent and have a history of paying bills on time.

Alt-A loans accounted for about 13 percent of U.S. home loans granted last year, according to Inside Mortgage Finance, and subprime loans about 20 percent. Industry executives have said subprime lending is likely to shrink by more than 50 percent this year. And much of the Alt-A market is vanishing, too.

Tom Lamalfa, managing director of Wholesale Access, a mortgage-research firm in Columbia, Md., expects that half or more of the market for no- and low-documentation loans will disappear.

"This will help bring reality to the industry," said Carlos Fuentes, president of Greater Tampa Association of Realtors.

Times staff writers Madhusmita Bora and Helen Huntley contributed to this story. Information from The Wall Street Journal and other wires services was also used in this report.

[Last modified August 3, 2007, 22:55:17]