Part Two of a Two-Part Series

With lenders now requiring more equity, more income documentation and higher credit scores, fewer subprime borrowers are able to refinance out of adjustable-rate loans. And for many borrowers whose rates have gone up or are about to reset, the clock is ticking.

While the problem affects only a “fraction” of all loans nationally, the consequences could be dire at the local level, according to Rachel Drew, co-author of the “State of the Nation’s Housing” for 2007, a report released earlier this month by Harvard University’s Joint Center for Housing Studies. Especially at risk are communities where many loans were subprime and where growing numbers of borrowers are facing foreclosure.

Massachusetts lenders and Realtors say they’re seeing more homeowners running into trouble as a result of tightening underwriting standards and the resulting inability to secure a refinance loan.

Bob Rocklein, a longtime mortgage lender and founder of 10-month-old Family Trust Mortgage in Burlington, said he has a dozen files in his office documenting borrowers who would like to refinance but for a variety of reasons cannot.

A few months ago, in his company e-newsletter, Rocklein urged clients who were considering a refinance loan to apply immediately. For some borrowers with checkered credit, the window of opportunity may have closed since then. Most of the credit-tightening changes being implemented in the mortgage industry have taken place in the past 60 days, Rocklein said.

Opinions on exact timing of the changes vary, but most lenders agree that stricter lending standards began to take root within the past six months as evidence of mounting payment delinquencies and default rates in the subprime arena began to pile up.

Rocklein is not alone in his inability to help many refinance candidates. Many Massachusetts lenders and Realtors say people who already own a home, especially recent buyers or those who refinanced within the past couple of years, are having more difficulty than purchasers due to tighter credit standards.

“I know someone who refinanced two years ago. Their loan adjusted in summer of 2006, and now they’re in a position that they can’t make their monthly payments. Now, they can’t refinance because their credit score has gone down,” said Paula Fico, a Realtor associate with RE/MAX Results in Medford.

Fico said she knows of seven or eight other homeowners in similar situations. In contrast, most new homebuyers with whom she’s recently worked have been “pretty strong” in term of their ability to secure a mortgage.

Kathie Sauter, senior vice president for sales at Salem Five Bank, said her bank also is seeing fewer refinance candidates it can help these days. Many have so-called payment-option ARM loans – adjustable-rate mortgages where the borrower’s option to make a minimum payment each month could put them in the position of owing more than they borrowed. Problems created by such negative-amortization loans have been exacerbated by a slumping real estate market where homes may be worth less than when they were purchased even a short time ago.

Salem Five offers option ARM loans, but only rarely and only to savvy borrowers with higher incomes, Sauter said.

Federal regulators targeted option ARMs and interest-only loans last fall in a guidance they released directing banks and credit unions not to offer such loans to borrowers who wouldn’t qualify for a conventional mortgage product.

Sauter said she thinks the loan market continues to serve first-time homebuyers well, largely because government-assisted loan products remain available to them.

“We are not seeing fewer people we can qualify for a purchase loan today,” she said. “I really feel that way. I think we can help them.”

Rick Loughlin, 2007 chairman of the Greater Boston Real Estate Board and president of Coldwell Banker Residential Brokerage in New England, said the numbers tell him a different story.

“Lenders [have become] more deposit-oriented and credit score-oriented” in the past year, he said, which is resulting in buyers taking longer to qualify for financing, if they can at all. “It’s not a good thing for the housing market,” he said.

At Coldwell Banker, he said, sales of homes under $500,000 are down in the past year.

Homes also are staying on the market longer than they did a year ago, according to Loughlin and data from the MLS Property Information Network, a Shrewsbury-based multiple listing service that operates in most Massachusetts markets. Last June, single-family homes stayed on the market an average of 118 days; today, it’s 137.

While the current home market slump began before the subprime mortgage crisis began – and, indeed, was a major catalyst for it – Loughlin said the tighter underwriting standards now are feeding into prolonging the housing downturn.

Refi Fizzle

With many lenders that offered less-conventional loans to riskier borrowers now going out of business, it’s almost inevitable that borrowers seeking home mortgages will have fewer options, said Jim Campen, a board member of the Massachusetts Affordable Housing Alliance and professor emeritus of economics at the University of Massachusetts at Boston.

But, he said, that’s not a bad thing.

“Lots of people got loans who shouldn’t have gotten them, and that was not a good thing for them, and also had negative impacts on others,” he said.

Massachusetts Mortgage Bankers Association Executive Director Kevin Cuff suggested that other factors besides changing credit standards could explain why fewer people are taking out refinance loans now than three or four years ago.

“I think the reason is that people who could tap equity have tapped it to the end,” he said. “Or the interest rates have gone up.”

However, Drew, co-author of the Harvard study, said tightening credit standards are a major factor limiting the number of refinance loans.

Whatever the cause, refinance activity in Massachusetts has decreased. Between January and May 2006, 150,514 refinance mortgages were originated in the Bay State. In those same months this year, the number has fall to 131,780, according to statistics compiled by The Warren Group, Banker & Tradesman’s parent company.

Nelson Braga, vice president and chief of the mortgage lending division at $1 billion Bristol County Savings Bank, said the combined factors of rising interest rates, sputtering home values and changing credit standards leave his bank unable to help as many refinance borrowers they’d like.

The real question now is how best to help borrowers caught in this precarious situation.

Robert Pulster, executive director of Jamaica Plain-based nonprofit Ensuring Action Through Stability in Our Community, which assists borrowers facing foreclosure, said his agency is continuing to “chip away” at a number of options, including negotiating with the borrowers’ lenders and working with other lenders and government agencies to develop more products that will assist them.

Pulster said only 40 percent of the 200 or so borrowers in trouble that have approached ESAC can be helped. And for them, at this stage, there aren’t that many options.