Mortgages harder to get for local borrowers

Last month, Carol Allen was two months out of bankruptcy and set to refinance her Seattle home.

Option One Mortgage Corp. had approved a low fixed rate, plus money to remodel her kitchen and replace her broken-down truck.

Then, just before closing, Option One decided to "reprice" loans in its pipeline, adding 1.6 percentage points to her interest rate and about $400 a month to her payment.

"I can't afford that," Allen said last week.

So the community health educator for Public Health -- Seattle & King County walked away, sticking with her adjustable-rate mortgage.

Allen's story is just one example of how the hangover in the subprime mortgage market, which serves people with poor credit, is causing headaches for many Seattle-area homeowners and buyers.

Lenders who previously approved mortgages to people with bad credit, no down payment and little or no documentation of income now are refusing loans if even one of those three factors is questionable. This is true even in Seattle, where homes have so far continued to appreciate.

"I see a number of individuals even in our existing pipeline that maybe a month or two ago were being choosy," said Adam Stein, president of American Brokerage in Auburn, and the Washington Association of Mortgage Brokers. "Now they're realizing that maybe they held out too long."

Changing standards

Lenders had less incentive to screen out risky borrowers during the go-go real estate market of the past few years because they quickly turned around and resold mortgages on the secondary market. And, while home values were increasing fast, borrowers who could not make payments could still sell for more than they owed.

But that's changed.

In recent months, home prices have declined in much of the country, borrowers increasingly are defaulting, and investors are fleeing from the home market.

Option One spokeswoman Christine Sullivan acknowledged Monday that the repricing of loans such as Allen's was part of the larger fallout. "Like other lenders, Option One has tightened underwriting guidelines and made product and pricing changes," she said.

Tightening standards is good, but it has gone too far in certain cases, Stein said. He noted that a recent customer's low credit rating and high-debt level precluded him from getting a loan, despite an income of more than $200,000 a year.

"This guy's still got $80,000 to $90,000 a year of discretionary income," he said. "The market just isn't tolerating exceptions right now, even if they would make sense."

The subprime market has nearly dried up altogether during the past two to three months, said Angela Ceaser, who owns Integrity Community Mortgage in Lakewood, and worked with Allen on her loan.

Lenders have eliminated some programs entirely, Ceaser said. But while the subprime market has been most affected by recent problems, prime borrowers are not immune.

Ceaser said she recently ran into problems with a prime borrower whose information she fed back into Washington Mutual's system to look at other options after the bank already had approved a loan.

"It wouldn't even price her," she said, even though she still was able to close the already approved loan.

Laura Opson of Seattle talked with a mortgage broker about what she could afford before starting her search for a new home. But she ran into trouble in July, after sellers accepted her offer on a Ballard house.

A lender approved a prime mortgage for 80 percent of the purchase price, but she had problems getting a second loan to make up the difference between the first mortgage and her 10 percent down payment. The main problem was that she started working as a self-employed legal nurse consultant just two years ago and that her income had reached its current level only within the preceding six to eight months.

Lenders required more paperwork than she ever had to produce for past mortgages, she said on Tuesday.

"I was approved one day and the next day the program disappeared," she said. "I went through about seven of those."

What to do?

For people whose credit is keeping them from qualifying for a loan, the solution can be as easy as checking their credit reports. Ceaser pointed to a current client whose reports still included debts that were discharged in bankruptcy in 1999.

Those with money available can improve scores by paying down certain debts, Stein said. Opson, for instance, got her second loan approved last week after paying down some debts to improve her debt-to-income ratio.

Linda Taylor, housing director for the Urban League of Metropolitan Seattle, helps people budget so they pay bills on time. "Nothing can cure bad credit but time and repetition of current payments," she said.

Homeowners should shop around, state Department of Financial Institutions Director Scott Jarvis said. "People who can lend you money all have different sources for their money and they all have different standards."

But some people who were not really in a good position to buy in the first place will lose their homes, he acknowledged. "A lot of the money came in from Wall Street and that money isn't there now."

On Aug. 31, the Federal Housing Administration announced a new program to back refinanced loans to an estimated 80,000 families who are in default but have strong credit.

Stein noted that the FHA program would be of limited use unless Congress raised the agency's loan limit, which is currently $362,790 in the Seattle area. Also, many mortgage brokers do not work with FHA-insured loans because the agency, compared with other government loan programs, has high annual license fees and onerous standards, he said.

"Nobody else makes you jump through those hoops," said Stein, who does work with FHA loans.

Congress is looking at possibly making it easier for mortgage brokers to work with FHA loans.

What now?

But it may be that none of these will help homeowners such as Patricia Sawyer of Renton.

Sawyer, a file clerk at Group Health, refinanced into an adjustable-rate mortgage in December, after hearing a radio ad promising low payments and no closing or appraisal costs.

"Now I know it was too good to be true," she said last week.

Her new payment was lower than her old one, but higher than expected, and she didn't realize it added $1,100 a month to her principal because it was less than the interest charge.

With her payment set to jump in October, Sawyer would like to refinance.

But her credit is bad, she said, and if she qualified for a new loan, the added principal and prepayment penalty from her current lender would push her payment above what she could afford.

Opson closed on her new home Friday and moved Sunday. And Allen, who walked away from her refinance, said her adjustable-rate loan resets in October. She plans to save and work on her credit in hopes of qualifying for a better loan in a year or so.

"I can't even tell you the last time I even went shopping," she said.

LOAN TERMS

Here are the factors that mortgage lenders generally look at when deciding whether to approve a loan:

Income: generally shown by recent pay stubs or two years' worth of tax returns.

Credit score: a number that each of three credit bureaus (Experian, TransUnion and Equifax) calculates using software developed by Fair Isaac and Co. -- thus the term "FICO score."

Debt ratio: the ratio of total debt to income.

Loan-to-value ratio: the ratio of the fair market value of a home to the value of the loan that will finance the purchase.

FOR MORE INFORMATION

U.S. Department of Housing and Urban Development: hud.gov/foreclosure/, 800-569-4287

Homeownership Preservation Foundation: 888-995-HOPE, 995hope.org.

Washington State Department of Financial Institutions: dfi.wa.gov/consumers/mortgage_increases.htm.

National Association of Mortgage Professionals: 888-680-NAMP, www.namp.org