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Lending curbs squeeze buyers
Baltimore Sun
The mortgage credit crunch not only is affecting interest
rates that homebuyers are quoted, but is triggering changes
in less visible areas such as minimum credit scores,
geographic location and type of properties, even controls
on who orders credit reports.
These new restrictions are magnifying the importance
of factors such as FICO credit scores and giving
rise to lawsuits against major creditors such as American
Express and Citibank.
Here's a quick overview of what's happening: Though
recent run-ups in rate quotes for jumbo mortgages
-
those over $417,000 - have received widespread
publicity, subtler underwriting changes by lenders
have not. Yet
some of these could actually have wider impacts.
For example, a traditional cut-off point between prime
and subprime loans - 620 FICO scores - has migrated upward
in recent weeks. Some mortgage companies are posting
680 FICOs as the new demarcation line; others have set
the break point slightly below.
Webster Bank, a wholesale lender based in Connecticut,
told its broker network on Aug. 7 that its "minimum
credit score has been increased to 680," and that's
with full documentation of applicants' income and assets.
"I think the days of 620 [FICOs] are about over" for
nonconforming mortgages that are not being originated
for sale to Fannie Mae or Freddie Mac, said Bob Armbruster,
CEO of Armbruster Mortgage Services Inc. of Lawrenceville,
Ga. "Investors are just too afraid to take the risk
anymore."
Mark Teteris, chairman and CEO of Lakeland Mortgage
Corp. in Bloomington, Minn., said: "We see this
every day now - investor e-mails telling us the minimum
FICO for certain loans we want to see is 700" -
or higher for low-doc applications.
Other lenders have bumped up minimum scores for fully
documented new loans more modestly - from 620 to 640,
while still others are requiring 720 FICOs as the minimum
needed for any sort of limited-documentation applications.
The upward squeeze on FICOs is putting a new premium
on raising homebuyers' numbers and obtaining correct
scores, based on full reporting of credit data, say mortgage
and credit market experts.
The squeeze is also triggering suits against some lenders
and card companies over their credit reporting practices.
In a class action filed July 25 in the U.S. District
Court for the Southern District of Florida, plaintiffs
charged that American Express and Citibank are depressing
large numbers of clients' scores by withholding credit
account limits from Equifax, Experian and TransUnion,
the three dominant credit bureaus. Without credit limits
or account maximums, say the plaintiffs, FICO software
often penalizes the borrower by reducing scores.
Neither card company would comment on the specifics
of the litigation. However, American Express said its
green and gold card holders do not have "pre-set
spending limits," and therefore there is no credit
limit to report. Spokeswoman Molly Faust also said that
the latest FICO model "differentiates between charge
cards and credit cards," and FICO scores are not
artificially depressed.
A Citibank spokesman, Samuel Wang, confirmed that "certain
cards" come with no pre-set limits, and therefore
limits cannot be reported to the bureaus.
Besides FICO scores, other key underwriting factors
under pressure include:
- Loan-to-value ratios (LTVs) and combined loan-to-value
ratios (CLTVs). Some lenders are abandoning zero-down
programs altogether, and others are requiring 10
percent minimum equity stakes. Some are restricting
maximum CLTVs
to 80 percent or 85 percent, where a second mortgage
or credit line is proposed on a home that already
has a first mortgage.
- Financial reserves. Rather than a minimum of
two months' in loan payments verified as on
deposit in
a bank, some lenders now want to see six months
for certain
loan categories.
- Restrictions on credit reports and appraisals.
One lender says it will only look at credit reports
it
has ordered from its own vendors - presumably
an anti-fraud measure. Another wants only the
freshest "comparables" for
appraisals backing loan requests - properties sold
within the last three to six months only, plus
detailed information
on asking prices of similar houses currently for
sale.
- Restrictions on geographic locations and minimum
loan sizes. Carl Delmont, CEO of Freedmont Mortgage
in Hunt Valley, says "we're beginning to see
tightening [on lending] in areas where delinquency
rates are high," as
well as growing unwillingness to finance smaller
mortgages, generally under $100,000.
Could the unfolding credit crunch create updated forms
of quasi-redlining by lenders - where whole categories
of borrowers, loan types, credit profiles and geographic
locations suddenly are shunned or priced out of reach?
In that event, could second homes, non-owner-occupied
properties, high-rise condos, central city rowhouses
- or people with minimal bank reserves, depressed FICO
scores or the wrong ZIP code - face rougher times in
the mortgage meat grinder?
Could be.
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