Time Crunch: Tightening Standards Pose Barrier to Borrowers Seeking to Refinance Adjustable-Rate Mortgages

June 29, 2007; As originally appeared in The Commercial Record by Amy Wyeth

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 on a 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.

Connecticut lenders say both would-be purchasers and refinance candidates are running into trouble as a result of tightening underwriting standards.

Mark Foreman, founder of Fairfield-based Cornerstone Capital Mortgage and Real Estate Services, and immediate past president of the Connecticut Association of Realtors, said he’s started a file in the past few months that contains names of applicants for refinance loans he’d like to help but can’t, because credit standards have changed.

Opinions on the 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.

Foreman said purchasers are equally affected.

“Obviously, this will affect individuals who are buying properties now, because with interest rates going up, [100 percent financing] loans less available than before and lenders requiring a higher down payment, a lot of borrowers won’t be able to afford as much,” he said.

In recent months, Foreman said, the credit score required to get a mortgage above subprime level has gone up from 600 to 640. The number of homes on the market is also up, he said, noting that many of those new listings are people who were unable to refinance and therefore must sell. The rising inventory also suggests that purchasers are taking longer to qualify for a loan, Foreman added.

Data from Consolidated MLS Inc., a service that tracks home sales in Greater Fairfield County – the western half of the state, where most sales activity takes place – show that out of 16,351 total properties, 9,073 single-family homes were on the market last week. On July 1, 2006, about 8,500 single-family homes – out of 14,652 total properties – were for sale in that region.

Today’s purchasers are more cautious of the loan terms they’ll accept than those in the past, Foreman noted, saying that’s probably because of media attention given recently to the foreclosure problems some people with subprime loans are experiencing.

“Before, I think, consumers were getting into situations they shouldn’t have,” he suggested. “Today, they are looking more carefully at documents they sign.”

Joan Carty, president and chief executive officer of the Stamford-based nonprofit Housing Development Fund, which in partnership with local banks develops and offers lending products to first-time buyers and offers home-buyer counseling, said she hasn’t seen a noticeable difference in would-be purchasers.

“We have seen people who had a tougher time getting first mortgages because of credit tightening,” she said. “But I wouldn’t say it’s a sizable number, because we want to keep people on a conservative route … the ones who want easy credit and a quick hit, we wouldn’t get.”

Carty noted that HDF is thinking of adding a new foreclosure assistance service to its repertoire, to respond to news about the effect of subprime loans that are foreclosing.

She said HDF anticipates there will be a great need for the service because of the number of adjustable-rate mortgages expected to reset within the next year.

“The forecasts for Connecticut are harrowing,” she said.

‘More Total Programs’
New England lenders and Realtors say many homeowners, especially recent buyers or those who refinanced within the past couple of years, are running into the reset problem now.

“I know someone who refinanced two years ago. Their loan adjusted in the 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 of RE/MAX Results in Medford, Mass.

William Calderara, executive vice president at Fairfield County Bank and immediate past president of the Connecticut Mortgage Bankers Association, said while purchase and refinance borrowers are each affected by tightening credit standards, refinance candidates may well bear the brunt, because, he said, purchasers have more loan product choice.

“I think there are more total programs available for first-time buyers,” he said. “You have Federal Housing Administration [loans] and the Connecticut Housing Finance Agency. Fannie Mae and Freddie Mac already have specific programs to help first-time homebuyers.”

Such products have always been around, he said, but require more paperwork. As a result, fewer people were accessing them in recent years because easier options were available.

Calderara said there are more first-time purchasers today than “trade-up” buyers seeking a larger home. Like Foreman, he said buyers who are out there are taking more time to qualify for a loan.

While it’s almost inevitable that first-time home mortgage borrowers will have fewer options because of tightening credit standards, “in the sense of keeping people out of trouble who are not ready for homeownership, that’s not a bad thing,” Carty said. “It was the laxity of standards that got people into trouble.”

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

Refinance activity in Connecticut actually has increased in the past year, however. Between January and April of 2006, 41,359 refinance mortgages were originated in the state. In those same months this year, the number rose to 56,143, according to statistics compiled by The Warren Group, The Commercial Record’s parent company. The number of purchase mortgages fell from 15,571 to 14,653 in the same period.

Between January and April of 2004 – a year with historically low interest rates and high home prices – 51,346 refinance mortgages and 16,983 purchase mortgages were initiated in Connecticut.

The question now is how best to help borrowers caught in such a precarious situation.

Robert Pulster, executive director of Jamaica Plain, Mass.-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.