Mortgage crisis may hurt sales this fall

The escalating mortgage crisis is expected to further depress house sales and prices in Massachusetts during the fall selling season as some potential buyers' loan applications are rejected or buyers delay making a purchase to see whether prices fall farther.

Summer's slumbering house market typically wakes up after Labor Day, but many prospective buyers who are trying to obtain a loan or tentative mortgage approval from lenders in preparation for their search are experiencing problems.

The mortgage industry's difficulties began early this year and came to a head last week when the nation's largest mortgage lender, Countrywide Financial Corp., said it had depleted a $11.5 billion line of credit and would restrict its lending. First Magnus Financial Corp. of Tucson, one of New England's biggest loan brokers, said it would stop lending altogether.

On Wednesday and Thursday, escalating fears about the industry's solvency also drove the Dow Jones stock index below 13,000 for the first time in four months.

"This is an amazing scene developing, and it could have a serious impact on people's confidence to go ahead," said Barry Nystedt, a real estate agent for Buyer Brokerage Realty in Newton.

Facing dwindling funds from jittery mortgage investors, lenders are tightening requirements for loans, increasing interest rates, demanding larger down payments, or completely withdrawing some mortgage products. The squeeze is being keenly felt in two important segments of the home buying population: first-time buyers with little or no money to put down and those who need jumbo mortgages -- above $417,000 -- which carry higher interest rates because lenders view them as riskier. Freddie Mac and Fannie Mae, two massive mortgage investors created by the federal government, do not purchase mortgages that exceed $417,000.

A loss of credit will cause house prices and sales in Massachusetts to continue dropping at least through the fall, said Patrick Newport, an economist with Global Insight, a business consulting firm in Waltham. And his national forecast has been getting gloomier as more mortgage problems come to light: Last month, he predicted new and existing home sales nationwide would be 6.76 million in 2007; now he's lowered that to 6.68 million.

"I can't see things turning around anywhere until next year," Newport said.

The biggest threat is buyers who had planned to enter the market but now might sit on the sidelines to see whether prices keep dropping, agents said.

Pat Magnell, a buyer's agent with Buyers Choice Realty in North Andover, said that buyers' awareness of the industry's problems was raised last week because Countrywide is so well known, in contrast to the dozens of obscure lenders that failed over the past year. She said a raft of sellers are reducing their prices.

Buyers "are aware they have more choices, and down the line, their choices may increase exponentially so they'll wait," Magnell said. "Can you blame them?"

Sellers who fear financing problems may jeopardize a deal are reducing their prices.

Mark Gibbons, an agent with Re/Max Landmark Realtors in Stoughton, said a client who was selling a house turned down an offer at the list price, in favor of a bid that was $15,000 lower because that buyer was more certain to obtain a mortgage.

"The dollars weren't as important as the confidence in the actual closing happening," Gibbons said.

Despite the number of lenders in crisis, pockets of the mortgage market remain intact, real estate agents said. While subprime lenders and mortgage companies that rely on Wall Street investors to buy their loans are unraveling, commercial and community banks that hold the mortgages in their loan portfolios are still lending.

Some agents said house prices in Massachusetts have dropped so much that buyers are now looking for dream homes they could not afford at the market's peak in 2005. In July, the median house price in Massachusetts declined 4.6 percent from a year earlier, to $334,000, and sales were down 8.3 percent, according to Warren Group, a Boston publishing firm that tracks the market.

"The sky is not falling," said Jamie Regan, owner of Century 21 Regan Realtors Inc. on Cape Cod.

Mortgage brokers said lenders are rapidly changing their loan terms, and buyers may not get the type of loan they expected unless they lock it in with their bank or mortgage company. For example, over the past week, some lenders increased interest rates on fixed-rate, second mortgages by 2 percentage points, to 9 percent, said Robert French, a mortgage planner for Greenpark Mortgage. Rates on adjustable second mortgages rose a half percentage point, to 8.5 percent, he said.

French said lenders have also recently reduced how much debt they allow their borrowers to carry, from monthly payments equal to about half of their gross income to as low as 40 percent today. They are also increasing requirements for credit scores, scrutinizing home appraisals to protect themselves against inflated estimates, and rejecting those who apply for mortgages suddenly deemed risky.

One of French's clients, who earns about $700,000 a year and has a high credit score, was recently unable to get a stated-income mortgage. These loans became popular during the housing boom because it does not require borrowers to provide a copy of their W-2 tax form to the lender.

Stated-income loans, French said, are "just disappearing."

Kimberly Blanton can be reached at blanton@globe.com.