Credit rules tightening up
NEW YORK – The loan you qualify for on Monday might be out of reach on Tuesday.
Bankers and lenders are rapidly changing their requirements as home sales and prices plummet nationally and delinquencies and defaults rise. Problems in the mortgage market are spilling into other lending markets as customers struggle to keep up with payments on other loans, such as auto and credit card payments.
“The market is reinventing itself daily,” said Les Berman, owner of Beverly Hills, Calif.-based EB Financial and a director of the California Association of Mortgage Brokers. “I did my first loan in 1971 and have never seen anything like this.”
To adjust their standards – which many critics say grew too lax in the middle of the decade – lenders now are raising minimum credit scores, offering smaller loans and requiring detailed proof of income and assets.
For those who do meet the tightened criteria, a new plan announced Tuesday by the Federal Reserve to provide $200 billion to the financial services sector should mean there is plenty of money available for borrowers and lower interest rates, said David Wyss, chief economist at Standard & Poor’s.
Mortgages have been among the worst performing loans in recent months. More than 16 percent of subprime mortgages – loans given to customers with poor credit history – were delinquent at the end of the third quarter, according to the latest data available from the Mortgage Bankers Association.
“Credit is the gateway right now,” said Dan Green, a certified mortgage planning specialist and author of TheMortgageReports.com. “Weak credit is cost prohibitive.”
And regardless of credit score, customers are going to have to provide proof of income and assets in the bank. Lenders have drastically reduced the amount of money they will lend on any given purchase and their maximum loan-to-value (LTV) ratios.
The LTV ratio measures the amount a customer borrows compared with the total value of the property. Traditionally LTV ratios did not exceed 80 percent, but during the peak of the housing market, borrowers could actually take out a loan worth more than the house.
Last year a borrower could get complete financing on a $300,000 home with a mortgage alone or in combination with a home equity loan or line of credit. Today, that same borrower likely needs $60,000 for a down payment or will face large fees and higher interest rates.
“If a customer is weak somewhere, he has to be stronger elsewhere to make up for it,” Green said.
The easy lending environment of the past few years extended into home equity products, which like mortgages are now seeing banks change their standards as defaults rise.
Tom Kelly, a spokesman for JPMorgan Chase & Co. said within the past eight months, Chase has focused on combined loan-to-value ratio, documentation and credit scores to improve loan quality, and raised minimum requirements for each. Chase also no longer offers 100 percent CLTV loans anywhere, with restrictions as tight as a maximum 65 percent CLTV in Nevada because of rising delinquencies.
Just as delinquencies and defaults are rising among mortgage and home equity products, problems are mounting for auto lenders as well.
Greg McBride, a senior financial analyst at Bankrate.com, said many auto lenders are requiring larger down payments on loans. In fact, McBride said changing credit requirements for auto loans are somewhat mirroring changes for home lending, with high credit scores and larger down payments needed to qualify for loans.
“Consumers with a risky profile qualify but for higher rates, if at all,” McBride said.
Turner Acceptance Corp., a subprime auto lender that offers loans in Illinois, has ramped up its due diligence while reviewing loan applications, Jonathon Levin, the company’s chief executive said. The lender typically works with first-time borrowers or customers with poor credit scores, Levin said.
Because Turner Acceptance works with subprime borrowers it is increasing its review of loans by requiring additional cross-checking on all parts of a loan, including references.
Levin said customers are having a harder time with down payments in recent months because rising consumer costs and a slowing job market have reduced their ability to save.
With customers struggling to make payments on loans backed by actual assets, credit card lenders have also seen an uptick in losses as fewer people are making payments.
Credit card lenders could write off more than 7 percent of their portfolios this year, compared with the 5.21 percent pace of write-offs in 2007, according to Fitch Ratings.