From the Wall Street Journal:
Lenders Curb New Mortgages In Weaker Areas
Move May Put Added Pressure On Prices in Hard-Hit States; Submarket Collateral Damage
By RUTH SIMON
October 23, 2007; Page D1
Some lenders are now making it tougher for borrowers in softening housing markets to get a mortgage.
The policy is designed to keep lenders from holding the bag if home prices in those markets continue to fall — and highly leveraged borrowers find themselves owing more than their home is worth. But the tighter standards, by discouraging home buyers, could add to downward pressure on home values in already weak markets.
Lenders such as J.P. Morgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. are cutting the maximum amount some borrowers can finance in counties or states where home prices are declining. Mortgage companies are also taking a tougher look at appraisals in housing markets with falling prices. Among the areas being hit by the tougher standards are parts of California, Florida and Michigan.
Lenders in the past have come under criticism for their failure to make loans in minority neighborhoods, a practice known as “redlining.” The latest round of tightening, by contrast, is broader, and aimed at markets where home prices are falling.
The sharper focus on soft housing markets comes after mortgage lenders have tightened their standards for all borrowers amid a slowing housing market, a widespread credit crunch and rising delinquencies. New national data from Equifax Inc. and Moody’s Economy.com show that the mortgage delinquency rate jumped to 3.3% in the third quarter from 2.3% a year earlier.
The impact of such restrictions could grow if these tighter standards become more widespread. It “could significantly impact the ability of even borrowers with good credit scores to buy a home if they don’t have a significant down payment,” says David Stevens, who runs the mortgage operation at Long & Foster Real Estate, based in Fairfax, Va. Last year, more than one-third of Long & Foster’s customers put less than 10% down, Mr. Stevens says.
With house prices falling, lenders are looking to control their risk, says Doug Duncan, chief economist of the Mortgage Bankers Association. But “there’s a little bit of a self-fulfilling prophecy,” he adds. “If you tighten standards, fewer people can qualify [for a mortgage]. Effective demand is going to be lower, resulting in lower house prices.”
Some of the lenders are reducing the maximum combined loan-to-value ratio, a measure of how much of a home’s value a borrower can finance using a mortgage and a home-equity loan. In August, J.P. Morgan Chase’s home-equity division cut the maximum amount borrowers in Nevada can finance to 85% of the home’s value. The unit won’t let borrowers finance more than 90% of their home’s value in seven other states — Arizona, California, Colorado, Florida, Michigan, New Jersey and New York. That compares to a maximum combined loan-to-value of 100% of a home’s value in Texas and Washington and 95% in other states. Chase made the move to reduce the chance that the loans it makes will wind up under water, a company spokesman says.
Wells Fargo, meanwhile, has expanded a program begun earlier this year that tightened standards in certain “declining” markets. Wells has reduced the maximum amount it will finance by 10 percentage points in markets the company has identified as “distressed.” The list includes more than 50 counties in seven states, including parts of California, Florida and Michigan. It also cut by five points maximum financing in more than 125 other counties in a total of 22 states and the District of Columbia. A spokesman says the company is monitoring credit conditions on a “day to day” basis.
In other cases, lenders are giving appraisals closer scrutiny. Bank of America Corp. says it is asking for more detailed appraisals in markets with falling prices. In many cases, appraisers are being told to drive by the property to get a better estimate of its value instead of just running information about the home through a computer model.