By Jody Shenn
March 22 (Bloomberg) -- The subprime credit crunch is beginning to ensnare even borrowers with better credit.
Lenders are increasingly refusing to lend to homebuyers who can't make a down payment of more than 5 percent, especially if they won't document their income. Until recently such borrowers qualified for so-called Alt A mortgages, which rank between prime and subprime in terms of risk. Last year the category accounted for about 20 percent of the $3 trillion of U.S. mortgages, about the same as subprime loans, according to Credit Suisse Group.
``It's going to be very difficult, if not impossible, to do a no-money-down loan at any credit score,'' said Alex Gemici, president of Parsippany, New Jersey-based mortgage bank Montgomery Mortgage Capital Corp. Companies that buy the loans ``are all saying if they haven't eliminated them yet, they'll eliminate them shortly.''
Tighter lending standards may slash subprime mortgage sales in half this year and Alt A mortgages by a quarter, according to Ivy Zelman, a Credit Suisse analyst in New York who covers homebuilders. The new requirements will force some prospective homebuyers to save more money for a down payment or risk being denied credit.
Pulling Back
Bear Stearns Cos., General Electric Co.'s WMC Mortgage, Countrywide Financial Corp., IndyMac Bancorp Inc., Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Credit Suisse have all said in the last two weeks they're pulling back from buying Alt A mortgages sold with no down payment or in a refinancing of the house's entire value. Such companies facilitate the mortgage market by buying loans and repackaging them for sale as bonds to buyers such as insurers and hedge funds.
``We've been warned,'' said Cheryl Hand, manager of Prudential New Jersey Properties' office in Manalapan, New Jersey. She said she's hoping a client of her realty brokerage who's been approved to buy a home with nothing down won't have the loan quashed before the closing.
Mortgages are categorized as Alt A when they fall just short of the typical standards of Fannie Mae and Freddie Mac, the two largest U.S. mortgage companies. Some mortgage lenders require a credit score of at least 700 for an Alt A mortgage, while others will accept a score as low as 620. The maximum score is 850. The average credit score is in the 600s, according to Bankrate.com.
Besides some loans requiring no down payment or proof of income, they are often made to buy a second home, a rental unit or to speculate on real estate. Also often falling into the category are loans that are ``option'' adjustable-rate mortgages, whose minimum payments can fail to cover the interest owed.
Defaults Rising
Consumers borrowed 100 percent of their home's value on about 18 percent of Alt A loans made last year, according to Bear Stearns, the largest mortgage-bond underwriter. Another 16 percent had loan-to-value ratios above 90 percent as well as limited documentation, they say. The category comprised about 5 percent of new loans in 2002, according to Credit Suisse.
Late payments of at least 60 days and defaults on Alt A mortgages have risen about as fast as on subprime ones, to about 2.4 percent, according to bond analysts at UBS AG. Loans in the category made to borrowers with low credit scores, equity and documentation are doing about as badly as subprime loans, according to Citigroup Inc. and Bear Stearns analysts.
Rapid credit tightening that's ``been isolated to the subprime world has really migrated'' in the past two weeks to Alt A offerings that involve borrowing nearly all of a home's worth, said Brian Simon, senior vice president at Mount Laurel, New Jersey-based mortgage bank Freedom Mortgage Corp. ``We're just hopeful it will settle down soon.''
California Prices
A borrower would have to come up with $23,750 to make a 5 percent down payment on a typical home in California, based on a $472,000 median price estimated by DataQuick Information Systems in La Jolla, California. She'd have to show enough income to pay $2,730.87 a month with a 30-year fixed-rate mortgage at 6.15 percent.
``It doesn't help somebody to get into a home when they can't afford to make the payments and continue living there,'' said Ann McGinley, owner of Action Mortgage, a brokerage in Santa Rosa, California, that's turned away a ``few buyers'' with good credit who may have been able to get loans last year.
While loans issued only on the basis of the borrower's ``stated'' income can be abused, they're appropriate for a divorcee with alimony who ``doesn't want to show an underwriter her paperwork because it's private'' or a borrower with a reliable roommate, she said. ``I personally have made a couple of real estate agents angry by advising people to not buy.''
Limits Welcomed
Some lenders say it's high time that buyers are discouraged from buying real estate with no money down.
``Could we have a little skin in the game from the borrower, please,'' said Rick Soukoulis, chief executive officer at LoanCity, a San Jose, California-based lender that stopped making mortgages last week to customers who want to borrow more than 95 percent of the value of their house due to the shrinking secondary market. ``Something to lose if you go into default?''
LoanCity, which made about $6 billion in mortgages last year, went out of business on March 20.
The slump in subprime loans has ``drastically eroded'' appetite for bonds backed by Alt A loans, according to a March 9 report by Credit Suisse. The extra yield that investors typically demand on the parts of the securitizations with the lowest investment-grade ratings have risen to 3.50 percentage points over the one-month London interbank offered rate from 2.15 percentage points in September, according to Bear Stearns.
Resale Woes
``If you couldn't sell something, you wouldn't do it either,'' UBS analyst David Liu in New York said. Part of the problem is falling demand for ``piggyback'' home-equity loans used to make down payments, he said.
New York-based Citigroup will no longer buy home-equity loans made to borrowers who won't prove their incomes and want more than 95 percent of their home's value, according to e-mails from salespeople. Mark Rogers, a spokesman, declined to comment.
New York-based Bear Stearns, the third-largest Alt A lender according to newsletter National Mortgage News, last week stopped buying such loans without down payments of at least 5 percent. For borrowers not fully documenting incomes or assets, the maximum loan-to-value ratio will be 90 percent.
Short Notice
Bear Stearns' EMC Mortgage unit told loan sellers of the changes on March 13, giving them a day's notice. On Feb. 26, EMC said it would start requiring down payments of only 5 percent in the low-documentation category, giving sellers until March 12 to submit loans under the old standards. On March 1, the deadline moved to March 6. EMC didn't change ``full documentation'' programs then.
People with poor or limited credit records or high debt burdens can take out only subprime mortgages, and typically pay rates at least two or three percentage points above prime loans. Subprime lenders have been increasingly raising their standards since mid-2006, and started cutting out nothing-down lending in late January, Montgomery's Gemici said. People who qualify for prime mortgages don't experience any trouble getting a loan.
The subprime meltdown might have been prevented if the Federal Reserve had acted faster, a Fed official said today.
``Given what we know now, yes, we could have done more sooner,'' Roger Cole, the Fed's director of banking supervision and regulation, told the Senate Banking Committee in Washington.
Going Forward
Bear Stearns will finance 25 percent to 30 percent fewer non-prime mortgages this year as it tightens credit, Chief Financial Officer Sam Molinaro said on the company's earnings call last week.
``Last year, we did about 50 percent less in subprime than we did the year before,'' Mary Haggerty, co-head of Bear Stearns' mortgage finance department, said in an interview, adding that it has been tightening Alt A standards since December. ``We always try to be ahead of the market.''
Countrywide Financial, the nation's top home lender, this month stopped making any loans with down payments of less than 5 percent when borrowers are ``stating'' both income and assets.
Since they have good credit, most borrowers able to take out loans with little down and high monthly payments relative to their pay or potentially rising ones knew the risks, Countrywide Financial CEO Angelo Mozilo said in an interview.
``People are adults and made choices in their lives because they wanted to own a home of their own,'' Mozilo said. ``America's great because people can make those decisions for themselves. The complaints about the loans only came when the opportunity for enrichment was gone'' because home prices flattened out.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net .
Last Updated: March 22, 2007 15:55 EDT
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