Tougher loan standards weigh on housing market

WASHINGTON -- Just when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow -- even for those with good credit.

Mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans.

That encompasses a wide variety of neighborhoods: McMansions in Scottsdale, Ariz.; luxury Miami condos; 1960 ranch houses in Flint, Mich.; and early 20th century kit homes in Metuchen, N.J.

The entire states of California, Florida, Arizona, Michigan, Ohio and Nevada -- which have seen the highest foreclosure rates and the worst price declines -- are blackballed on some mortgage insurers' lists.

Banks that have lost billions because of bad bets during the housing boom are now reverting to strict lending standards not seen in nearly 20 years, according to industry data and interviews with lenders.

For new home buyers and those seeking to refinance, it can mean higher down payments and a higher bar for credit scores, among other requirements. The toughest restrictions are in markets where home prices are falling, though regions where property values are rising are not immune.

"We're in the midst of an epic, broad, sweeping change in the mortgage industry," said Chris Sipe, a loan officer with America East Mortgage in Frederick, Md.

The reluctance to extend credit comes despite a flurry of government initiatives, including steady interest rate cuts by the Federal Reserve, intended to make it easier for would-be borrowers and those facing interest-rate resets on their mortgages.

Lenders' growing leeriness threatens to dampen sellers' already soggy prospects for the spring home-buying season -- and that means more pain for the already battered housing sector and the broader economy.

In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans -- those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.

A check with a couple of insurers shows they did not flag Chicago and its suburbs.

With banks and mortgage insurers pulling back, state and federal programs for first-time buyers and people with poor credit are attempting to fill the void.

Don Brekke, an equipment operator from Colorado Springs, Colo., tried to buy a bank-owned 1950s ranch home for $113,000. At first he couldn't get a loan because the house was in a potentially declining market, and lenders required a 10 percent down payment, more than he could afford.

Ultimately, he was able to qualify for a 100 percent loan from Colorado's state financing authority, and he plans to close in the coming days.

"It was a bunch of headaches -- going around and around to get this done," Brekke said.

There is a silver lining: The Federal Reserve has repeatedly cut interest rates, helping borrowers whose mortgages were just about to reset to higher rates and people with student loans. Reflecting the Fed's efforts, rates on 30-year mortgages dropped below 6 percent this week for the first time in more than a month.

But the long-term impact of the Fed's move is far from certain, and the central bank's actions could end up feeding inflation and pushing up long-term rates.

"The credit crunch is much like the movie villain that refuses to die," said Greg McBride, a senior financial analyst at Bankrate.com. "The effects are spilling out, far beyond what was originally seen."