10/15/2014
Homebuyers face tightest credit market in 16 years | Business & Technology | The Seattle Times
Winner of Nine Pulitzer Prizes
Business / Technology
Originally published Saturday, October 11, 2014 at 8:03 PM
Homebuyers face tightest credit market in 16 years
In May, credit availability for all home loans was half of what it was in the late 1990s, when the
housing market was making steady gains much like today, according to index.
By Prashant Gopal
Bloomberg News
James Bregenzer, a 31-year-old marketing strategist in Chicago, was rejected for a mortgage in May
after successfully financing two previous home purchases.
The hitch this time: His monthly payment would have been $100 more than the lender was willing
to approve.
Bregenzer is in good company. Standards in the U.S. are so high and inflexible that former Federal
Reserve Chairman Ben Bernanke, now a Brookings Institute fellow-in-residence with a net worth of
at least $1.1 million, said at a recent conference that he couldn’t refinance the 4.25 percent
mortgage on his row house in Washington, D.C.
Even some doctors struggle to get home loans if they’re self-employed.
“We asked if we could go over by $100 and were told that’s just not going to work,” said Bregenzer,
who bought his first home before getting married in 2008. “The process of buying a home used to
be stupid easy. Now, my wife and I were buying a home with two salaries, we make a heck of a lot
more than I used to, and I have to go into great and terrible detail to show documentation.”
Lenders are continuing to tighten the credit vise on homebuyers after five straight years of
economic expansion, imposing the toughest standards since at least 1998, according to a new index
by CoreLogic.
In May, credit availability for all home loans was half of what it was in the late 1990s, when the
housing market was making steady gains much like today, according to the Housing Credit Index.
Banks are less likely to overlook periodic shifts in income or brief credit lapses in adopting rigid
rules to avoid losses after the housing crash, leaving creditworthy Americans without financing.
“It is clear that credit is quite tight relative to normal,” said Mark Fleming, chief economist at
CoreLogic.
While banks shouldn’t revert to the loose credit standards of the housing bubble, it’s possible for
lenders to expand credit while still being prudent, as they did in the late 1990s, he said.
The CoreLogic gauge uses 1998 as a baseline and considers six characteristics, including the share
of borrowers with low credit scores, small down payments and high debt relative to income, along
with the number of mortgage brokers and adjustable-rate loans.
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10/15/2014
Homebuyers face tightest credit market in 16 years | Business & Technology | The Seattle Times
While federal programs for struggling homeowners have helped to boost refinancing, credit
availability for home purchases in May was about a third of what it was in 1998, according to the
index.
The national housing market 16 years ago was growing moderately much like it has this year: Prices
rose 5.3 percent in 1998 from the year earlier, according to data from the National Association of
Realtors.
Mortgage purchase applications are down 43 percent from October 1998, according to a Mortgage
Bankers Association index released recently.
Professionals with established careers whose earnings fluctuate may no longer be considered good
credit risks and are having trouble getting conventional financing.
This group includes self-employed professionals, doctors with their own practices and nurses who
cannot show two years with an employer because they’ve shifted jobs a number of times, said
Michael Slavin, chief executive of Privlo, an online provider of real-estate loans for borrowers with
complex finances.
Slavin said some of the employees of the hedge funds and venture-capital firms that finance his
company’s mortgages have told him they’ve been rejected by lenders.
“It’s very hard to justify or come up with appropriate documentation — it’s not clear what
documentation needs to be for someone with variable income,” CoreLogic’s Fleming said. “That
happens at the low end of the income distribution and at the high end.”
Bregenzer said he and his wife, Katie, who also works in marketing, were told by Shelter Mortgage,
based in Milwaukee, that it wouldn’t fund the loan they needed in May, about four months before
their son, Andy, was born.
Greater Lakes Credit Union, a local lender in North Chicago, gave the couple a 30-year fixed
mortgage. The Bregenzers provided a down payment of $60,000 for the $470,000 four-bedroom
home, which they purchased in July.
Their monthly payment is $3,100, including taxes and insurance, said Bregenzer, who owns a
private-equity firm in addition to working full time in marketing.
Philip LaGiglia, director of mortgage services at Great Lakes Credit Union, said the nonprofit
group’s lower fees and rates let it keep payments down and distribute loans more widely.
“I’ve been in the mortgage-lending industry for 23 years and in no time has it been more difficult
than right now,” LaGiglia said.
A spokesman for Shelter Mortgage declined to comment.
Easy credit bubble
During the housing bubble in early 2005, credit for buying homes was at its loosest, more than
twice as available as in 1998, according to the Housing Credit Index.
Lenders raised standards after the 2008 housing collapse compelled the government to rescue
Fannie Mae and Freddie Mac and the companies forced banks to buy back bad loans from them
with underwriting errors.
Lenders are getting penalized for “nonmaterial minor foot faults,” said David Stevens, president of
the Mortgage Bankers Association and former head of the Federal Housing Administration.
Today, about 10 percent of borrowers with purchase loans have a FICO credit score of 660 or
below, on a scale of 350 to 850, compared with about 20 percent in 2001, according to Taz George,
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10/15/2014
Homebuyers face tightest credit market in 16 years | Business & Technology | The Seattle Times
an Urban Institute researcher.
While low down-payment mortgages have become more common, borrowing now requires morepristine credit, George said.
“What you have to do if you’re a lender today is to lend defensively,” Stevens said. “The sifter
plucks out anything that has a story to it that you might have to defend sometime in the future. It’s
risk avoidance in the extreme.”
Low wages to blame
Anthony Sanders, an economics professor at George Mason University in Fairfax, Va., said the
main issue in the housing market is the income of borrowers, not the standards of lenders.
He said the subprime collapse in 2008 damaged the finances of borrowers and that incomes,
particularly for low-wage workers, have been stagnant.
“If you loosen up credit standards, there isn’t sufficient income to restart the fire,” Sanders said.
“What you’d have to do is lower credit standards so much that it would be adverse to the economy
if we had another default crisis.”
Julian Castro, who became Secretary of the Department of Housing and Urban Development in
July, has said the FHA is working with lenders to ease credit by making it clearer when they’ll have
to absorb the costs of soured loans.
“Policymakers are cognizant that the pendulum has swung too far toward restricting credit
availability and there’s a concerted effort to expand the credit box in the weeks and months ahead,”
said Isaac Boltansky, an analyst at Compass Point Research & Trading in Washington.
Lenders have further tightened the availability of mortgages for purchases 22 percent in the first
five months of this year, according to the Housing Credit Index.
“In good times, everybody is optimistic and neglects the downside risk,” said Itzhak Ben-David,
finance professor at the Fisher College of Business at Ohio State University. “After a major shock,
people are too cautious. Nobody wants to have the risk of holding the hot potato.”
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