Part One of a Two-Part Series
The effects of the subprime lending crisis are far-reaching, affecting not only borrowers but lenders and mortgage brokers, as well.
The market for such loans is rapidly shrinking, Massachusetts lenders say. The number of would-be borrowers isn’t contracting, but the pool of lenders and investors who are willing to purchase some types of subprime loans is.
“I think some institutions have definitely tightened up underwriting standards,” said Leominster Credit Union’s senior vice president for lending, Gordon Edmonds, who currently is serving as the credit union’s interim president and chief executive officer. Wall Street investors, wholesalers and others, such as government-sponsored enterprises Fannie Mae and Freddie Mac, will no longer underwrite certain types of loans sought by borrowers with lower credit scores, who aren’t willing or able to document their incomes or who don’t have a large enough down payment, he said.
“A lot of times it’s because they have experienced some problems in their loan portfolios because they’ve been somewhat liberal,” Edmonds said.
Eric Nelson, chief executive officer of United Funding, a Milford-based broker and lender that offers prime and subprime loans, said investors are not changing their prime market standards for borrowers with the best credit, but noted that their increased skittishness has reached beyond subprime products to Alt-A loans, typically offered to borrowers who meet Fannie Mae and Freddie Mac credit score standards but do not meet strict guidelines for documentation, property type, debt ratio or loan-to-value ratio and subsequently are charged a higher interest rate.
Loan originators don’t always know which specific risk factors their secondary market purchasers are concerned about when they change criteria for the loans they’re willing to underwrite, added Kathie Sauter, Salem Five Bank’s senior vice president of sales. But, she said, it’s never been more publicly evident than in the past six months or so, when standards began changing, that “anybody who securitizes or funds loans has an interest in what they’re purchasing.”
Five of seven bank and non-bank lenders interviewed by Banker & Tradesman said underwriters’ stricter guidelines are directly affecting their business in one way or another. Nationally, 16 percent of senior loan officers at large, domestic banks and U.S. branches of foreign banks tightened standards on residential borrowing in the first quarter of 2007, according to a Federal Reserve Bank survey.
That means turning away prospective borrowers who, mere months ago, may have qualified for a loan.
“Thirty percent [more] of the borrowers who have contacted us [in recent months] Â… we are not able to help for one or another factors,” said Jim Picciotto, owner of Patriot Funding, a Framingham-based lender and broker that Picciotto said has financed billions of dollars worth of loans since its inception in 1994. In the past, Picciotto said, his firm was unable to secure loans for about 5 percent of applicants.
Massachusetts Mortgage Association Executive Director Denise Leonard, who also owns Constitution Financial, a lender-broker business in Wakefield, said “30 percent doesn’t seem overinflated” as an estimate of how much potential business has been lost as a result of the recent tightening in credit standards by lenders and investors.
Other lenders declined to quantify the amount of business lost in the tightened lending environment, but said the number of borrowers eligible for subprime loans has decreased greatly. Local brokers report fewer mortgage products are available to them, but few, if any, have stopped offering subprime loans altogether.
“We might not have fewer products, but we have stricter criteria for those that we have,” said Laura Dorfman, senior vice president for residential mortgages and consumer lending at South Boston-based Mt. Washington Bank.
For example, some investors have raised the credit score bar that separates prime and subprime borrowers, she said.
Dorfman, whose bank sells some of its loans to investors, said that many investors used to consider a borrower with a FICO credit score of 580 or below a candidate for a subprime loan. Today, “anything below 620 could be considered a subprime borrower.”
There are also fewer loan products available to borrowers with credit problems, she said, and lenders are requiring larger down payments.
“For borrowers with low credit scores, six months ago they might have been able to get a [loan-to-home-value of] 95 percent or 100 percent, but now the amount of the down payment [required] might be 10 percent” of the home purchase price, Dorfman said.
Widespread Changes
Other mortgage products increasingly are hard to come by or no longer offered at all by certain lenders.
TD Banknorth, for example, stopped offering interest-only loans in early 2007, said the $40 billion regional bank’s Senior Vice President for Mortgage Lending William Zafirson.
“As we surveyed the environment and rates, we stopped offering interest-only loans,” Zafirson said. “We don’t offer it [at the moment] because we want to make sure we are being prudent lenders.” He said that type of loan, in which a borrower pays off interest, but not principal, is not appropriate for everyone.
United Funding’s Nelson said he’s seen an increasingly limited market for no-ratio loans, which do not state the borrower’s income but require verification of assets and employment. The ratio referred to is debt-to-income.
Nelson said 100 percent-financed home loans for people with lower credit scores have also disappeared within the past four to six months. Picciotto cited one Wall Street underwriter’s loan-acceptance chart that stipulated a borrower with a 580 credit score would be considered only if the person had 10 percent of the home value to put down.
“You used to be able, in a lot of cases, to go up to 100 percent,” he said. “That’s changed.”
However, Nelson and Leonard said some lenders and investors will still underwrite riskier loans.
“[Credit score] and loan-to-value guidelines have been changed [but] they vary per investor,” Leonard said.
Nelson said United Funding works with a large enough pool of different lenders that he still has multiple alternatives if one won’t underwrite a certain type of loan.
“The changes aren’t uniform,” he said, but the general trend toward stricter underwriring guidelines is almost universal. And there are far fewer lenders willing to invest in borrowers with the poorest credit, who represent the greatest risk.
There may be some uncertainty about which risk factors investors who change guidelines are most concerned with, the failure of more than 30 subprime lenders nationally in recent months has given industry practitioners more than enough cause to be more cautious.
“We know for a fact that some of these lenders are no longer in existence, or that [regulators] have shut their headquarters down,” said Leominster Credit Union’s Edmonds, speaking of those he said offered loans under “loose standards.”
Investors and lenders also are keeping close tabs on factors external to individual borrower risk, including stagnant or falling home values, and regulatory or legislative initiatives to curb borrower access to certain loan products blamed for many recent foreclosures, such as teaser-rate adjustable subprime loans.
“I’ve been doing this since 1989,” Picciotto said, “and at the end of the day, underwriting guidelines come and go. When a borrower asks me, what’s going to happen to interest rates, I tell them the rates will change. It’s the same with underwriting. The standards will always change.”
Next week: Tightening underwriting standards pose new challenges for borrowers.
