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Mortgage fallout's ripple effect raises
the stakes for borrowers
By Kenneth R. Harney
WASHINGTON -- The mortgage credit crunch is not only
affecting interest rates that home buyers are quoted,
but also is triggering changes in less visible areas
such as minimum credit scores, geographic location and
types 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 of $417,000 and above-- have received widespread
publicity, subtler underwriting changes by lenders have
not. Yet some of these could have wider effects.
For example, a traditional cutoff point between prime
and sub-prime loans -- a 620 FICO score -- 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
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 are about over" for
nonconforming mortgages that are not being originated
for sale to Fannie Mae or Freddie Mac, said Bob Armbruster,
chief executive of Armbruster Mortgage Services Inc.
of Lawrenceville, Ga. "Investors are just too afraid
to take the risk anymore."
Added Mark Teteris, chief executive of Lakeland Mortgage
Corp. in Bloomington, Minn.: "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 home buyers' numbers and obtaining correct
scores, based on full reporting of credit data, say mortgage
and credit market experts. It's 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 cardholders do not have "preset spending
limits," and so 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 scores are not artificially depressed.
A Citibank spokesman, Samuel Wang, confirmed that "certain
cards" come with no preset 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% minimum
equity stakes. Some are restricting maximum CLTVs to
80% or 85%, where a second mortgage or credit line is
proposed on a home that has a first mortgage.
Financial reserves: Rather than a minimum of two months'
worth of loan payments verified as on deposit in a bank,
some lenders now want six months for certain loan categories.
Restrictions on credit reports and appraisals: One lender
says it will look only at credit reports it has ordered
from its own vendors -- presumably an anti-fraud measure.
Another wants only the freshest "comparables" backing
loan requests -- properties sold within the last three
to six months.
Restrictions on geographic locations and minimum loan
sizes: Carl Delmont, chief executive of Freedmont Mortgage
in Hunt Valley, Md., said that on lending "we're
beginning to see tightening in areas where delinquency
rates are high," as well as growing unwillingness
to fund mortgages 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?
Could second homes, non-owner-occupied properties, high-rise
condos -- 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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