|Loan officer Chris Sipe says the mortgage industry is "in the midst of an epic, broad sweeping change." (Timothy Jacobsen/Associated Press)|
WASHINGTON - Just when consumers and the US 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 one-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.
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.
The stinginess of banks is showing up in home loan statistics: The value of all new mortgages plummeted to $450 billion in the fourth quarter of 2007, down 38 percent from a year earlier, according to trade publication Inside Mortgage Finance.
Subprime loans virtually disappeared from the market, plummeting 90 percent to $13.5 billion in the October-December quarter.
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.