Lenders Broaden Clampdown on Risky Mortgages

[kurtyboy]

Source: Wall Street Journal (subscription only)

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.

...

Lenders say they are being forced to raise interest rates and stop offering certain loans because mortgage-bond investors have lost their appetite for a broad range of mortgages considered risky. 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. Notably, American Home Mortgage Investment Corp., which stopped making loans earlier this week, said late yesterday it would cease most operations, slashing its work force to about 750 from more than 7,000.

"It is with great sadness that American Home has had to take this action," Chief Executive Michael Strauss said in a statement. "Unfortunately, the market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative."

...

This credit squeeze "will further crimp the effective demand for housing, and will make the late summer home-sales season even worse than the dismal spring season," said Thomas Lawler, a housing economist in Vienna, Va.



Read more: http://online.wsj.com/article/SB118609866621886776.html?mod=hpp_us_whats_news

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July employment came in 26,000 jobs lower than expected--the housing slump is quickly becoming the first recession of the 21st century. Buckle up and hang on.

[flamin lib]

1. The ripple effect is just now starting.

A lot of the mergers and acquisitions have been financed by buying large blocks of home loans and then leveraging (borrowing against that asset) them to make other investments. As the assets evaporate so do the other investments financed by them. The whole Wallstreet game is a house of cards -- any one card can bring the whole thing down.

[slackmaster]

2. They're getting more cautious with low-risk mortgages too

My FICO score is somewhere close to 800, and a lender is putting me through the third degree to refinance some debt.

[leftyladyfrommo]

3. Used to be that an 800 credit score was just a free ride.

They must really be watching debt to income ratios again. Used to be that your debt to income couldn't be higher than about 25/18 on a 95% mtg. When I left the industry lenders were doing over 50% on some loans - especially the high credit scores.

Loaning people more than they can afford is just a recipe for disaster.

[slackmaster]

4. They got all torqued about a credit card that isn't mine - I'm divorced

Apparently a Visa card my ex has turns up on my reports. I had to have Bank of America fax a letter absolving me of responsibility for it.

Also the San Diego County Assessor doesn't have the title right on my house. I had to dig up a copy of a Quit Claim Deed my ex signed in 1998.

This isn't even a big loan we're talking about.

:eyes:

[Gormy Cuss]

5. Oy. Hope that settled the questions.

Can you imagine how many hoops you would have been required to jump through if your credit score were closer to 600?

It sounds like they're not taking credit scores as gold standards anymore, and that's a good thing. I worked with FICO credit scoring in the early days when it was an exceptionally crude tool and although it has been refined to reflect a reasonably good risk assessment for consumer credit I have doubts that it's worth much by itself especially for high scorers.