Robert Selna,Carolyn Said, Chronicle Staff WritersSan Francisco Chronicle
Sunday, September 12, 2010
In 2006, Arthur Brito, a self-employed Bay Area landscape designer, and his wife were prequalified for a $625,000 home loan. After being priced out of the housing market by inflated values, they started looking again last year, but quickly learned that the mortgage crisis had changed their fortunes: They now qualified for a loan of only $280,000.
Brito's experience illustrates how residential lending practices have shifted dramatically, from a market where high-risk buyers got loans far exceeding their ability to pay to one in which borrowers who are employed and have good credit and a healthy down payment may be out of luck.
"Financially, we are the same people as we were in 2006, so it's pretty frustrating," said Brito, 33. "Our incomes haven't changed, but the rules have changed, so we don't really talk about buying houses anymore. We've shelved it."
Like Brito, many borrowers are suffering a housing loan hangover precipitated by historically lax lending standards.
In 2006, chicanery driven by avarice infected the mortgage industry food chain: Some mortgage brokers pushed risky loans, borrowers lied about their income, appraisers inflated home values, lenders originated shaky mortgages, Wall Street firms bundled them as securities and sold them, and ratings firms characterized them as safe investments.
At the center of this distorted world was the subprime loan, issued at a high interest rate to borrowers with tarnished credit, checkered employment history and little or no money in the bank. Wall Street firms such as Lehman Bros. traded in the lucrative high-interest loans, which yielded quick profits for brokers who sold them and lenders that originated them.
By 2005, the subprime market was $630 billion a year and growing - triple the $210 billion market in 2002.
Mortgage-backed securities create the liquidity that allow banks to originate mortgages, so they are not going away, but in many respects real estate lending has returned to its more traditional and conservative standards.
Higher standards
Borrowers generally need good credit, relatively large down payments, stable employment and a high percentage of income to debt to get a home loan. Dubious mortgages - with no money down, no documentation of income, adjustable rates that skyrocket after an introductory period - have largely gone by the wayside.
"The bottom line is that we have had a complete reboot of the mortgage lending system in this country," said Keith Gumbinger, vice president at HSH Associates, a leading publisher of mortgage and consumer loan information.
Gumbinger said there has always been risk associated with the different facets of mortgage lending, but during the housing boom, one risk was layered on top of another. Now, much of the risk in the market is undertaken by the federal government.
Since the subprime market dried up, buyers with lower down payments and subpar credit increasingly have turned to Federal Housing Administration-backed loans. The FHA requires just a 3.5 percent down payment for buyers who obtain loans from government-approved lenders and pay an insurance premium. The program is funded by the premiums.
Historically, the FHA program had been more popular in states with lower housing costs. That changed with the Economic Stimulus Act of 2008, which doubled the maximum loan the FHA insured to $729,750 in high-cost areas. As a result, FHA lending has boomed in the Bay Area during the past two years. Nationally, FHA lending has gone from 2 percent of all loans originated in 2006 to 30 percent in 2010, according to Gumbinger.
The mortgage-backed securities markets now are dominated by Fannie Mae and Freddie Mac, the nation's largest buyers and sellers of mortgage-backed securities, which became insolvent in September 2008 and were placed under government conservatorship. By law, they are allowed to buy only conforming loans, which include debt-to-income ratio limits and income documentation requirements.
"With the end of Lehman Bros. and others, the machines that create credit came to a standstill," Gumbinger said. "The securities markets are now broken for mortgages that are not supported by Fannie and Freddie."
With subprime loans gone and tighter government regulations, mortgage bankers labor to qualify buyers who don't fit the mold of the ideal borrower: traditional job, good credit, substantial down payment and low debt-to-income balance, according to East Bay mortgage banker John Schaff.
While self-employed people like Brito could have applied for a "stated income" loan three years ago with little documentation, they now have to supply business tax returns and a detailed account of their profit and costs, creating a complex formula and reducing their chances of approval, Schaff said.
Self-employed 'risk'
Because Brito is self-employed and gets more work in good weather than bad, he is considered a lending risk in today's market. As a result, his wife's modest income as a nurse at a nonprofit clinic was the primary basis for the couple's $280,000 loan limit.
"I would have had no problem getting Arthur a loan at a much higher level three or four years ago," Schaff said. "Generally, the new lending standards are a good thing, but he's an example of how the pendulum may have swung too far in that direction."
In 2006, Arthur Brito, a self-employed Bay Area landscape designer, and his wife were prequalified for a $625,000 home loan. After being priced out of the housing market by inflated values, they started looking again last year, but quickly learned that the mortgage crisis had changed their fortunes: They now qualified for a loan of only $280,000.
Brito's experience illustrates how residential lending practices have shifted dramatically, from a market where high-risk buyers got loans far exceeding their ability to pay to one in which borrowers who are employed and have good credit and a healthy down payment may be out of luck.
"Financially, we are the same people as we were in 2006, so it's pretty frustrating," said Brito, 33. "Our incomes haven't changed, but the rules have changed, so we don't really talk about buying houses anymore. We've shelved it."
Like Brito, many borrowers are suffering a housing loan hangover precipitated by historically lax lending standards.
In 2006, chicanery driven by avarice infected the mortgage industry food chain: Some mortgage brokers pushed risky loans, borrowers lied about their income, appraisers inflated home values, lenders originated shaky mortgages, Wall Street firms bundled them as securities and sold them, and ratings firms characterized them as safe investments.
At the center of this distorted world was the subprime loan, issued at a high interest rate to borrowers with tarnished credit, checkered employment history and little or no money in the bank. Wall Street firms such as Lehman Bros. traded in the lucrative high-interest loans, which yielded quick profits for brokers who sold them and lenders that originated them.
By 2005, the subprime market was $630 billion a year and growing - triple the $210 billion market in 2002.
Mortgage-backed securities create the liquidity that allow banks to originate mortgages, so they are not going away, but in many respects real estate lending has returned to its more traditional and conservative standards.
Higher standards
Borrowers generally need good credit, relatively large down payments, stable employment and a high percentage of income to debt to get a home loan. Dubious mortgages - with no money down, no documentation of income, adjustable rates that skyrocket after an introductory period - have largely gone by the wayside.
"The bottom line is that we have had a complete reboot of the mortgage lending system in this country," said Keith Gumbinger, vice president at HSH Associates, a leading publisher of mortgage and consumer loan information.
Gumbinger said there has always been risk associated with the different facets of mortgage lending, but during the housing boom, one risk was layered on top of another. Now, much of the risk in the market is undertaken by the federal government.
Since the subprime market dried up, buyers with lower down payments and subpar credit increasingly have turned to Federal Housing Administration-backed loans. The FHA requires just a 3.5 percent down payment for buyers who obtain loans from government-approved lenders and pay an insurance premium. The program is funded by the premiums.
Historically, the FHA program had been more popular in states with lower housing costs. That changed with the Economic Stimulus Act of 2008, which doubled the maximum loan the FHA insured to $729,750 in high-cost areas. As a result, FHA lending has boomed in the Bay Area during the past two years. Nationally, FHA lending has gone from 2 percent of all loans originated in 2006 to 30 percent in 2010, according to Gumbinger.
The mortgage-backed securities markets now are dominated by Fannie Mae and Freddie Mac, the nation's largest buyers and sellers of mortgage-backed securities, which became insolvent in September 2008 and were placed under government conservatorship. By law, they are allowed to buy only conforming loans, which include debt-to-income ratio limits and income documentation requirements.
"With the end of Lehman Bros. and others, the machines that create credit came to a standstill," Gumbinger said. "The securities markets are now broken for mortgages that are not supported by Fannie and Freddie."
With subprime loans gone and tighter government regulations, mortgage bankers labor to qualify buyers who don't fit the mold of the ideal borrower: traditional job, good credit, substantial down payment and low debt-to-income balance, according to East Bay mortgage banker John Schaff.
While self-employed people like Brito could have applied for a "stated income" loan three years ago with little documentation, they now have to supply business tax returns and a detailed account of their profit and costs, creating a complex formula and reducing their chances of approval, Schaff said.
Self-employed 'risk'
Because Brito is self-employed and gets more work in good weather than bad, he is considered a lending risk in today's market. As a result, his wife's modest income as a nurse at a nonprofit clinic was the primary basis for the couple's $280,000 loan limit.
"I would have had no problem getting Arthur a loan at a much higher level three or four years ago," Schaff said. "Generally, the new lending standards are a good thing, but he's an example of how the pendulum may have swung too far in that direction."
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