Weathering the Storm: Lenders are tightening loan standards in response to the mortgage crisis

Foreclosure rates are at historic highs, experts talk of economic downturn – or even the dreaded recession – and unemployment is on the rise.

While home lenders in southwest Missouri don’t think the situation in this area is as severe as the national outlook, some have tightened their lending standards to stave off more trouble.

Winds of change

One of the most widespread changes is the reduction of 100 percent financing – loans to borrowers who have no money for a down payment.

“Up until August of last year, most good solid prime lenders were making 100 percent loans every day to good borrowers. That loan is about to go away,” said Todd White, senior vice president and loan production manager for Arvest Mortgage. “It’s lenders saying, ‘Considering what’s going on, we’d like to see a little bit of a down payment.’”

Arvest is not alone in that boat; Marita Thomas, head of the residential lending department at Empire Bank, said loans without down payments are approaching extinction.

“We’re seeing 100 percent options going away, except through the Veterans Administration. Even (the Federal Housing Authority) requires 3 percent down,” Thomas said.

While some banks have increased basic home loan requirements, nearly all have increased the minimum requirements for the best interest rates.

Jim Batten, a board member at Guaranty Bank, said that while Guaranty’s underwriters have always been fairly conservative, the current economic outlook has caused them to tighten their standards.

“Guaranty has always looked at the quality of the borrower, but there is more scrutiny of that, with the current economy,” said Batten, who also is chief operations officer for AG Financial Solutions. “They’re making sure that projections and assumptions are reasonable and considering the risk even more.”

Arvest executive White said that the increased scrutiny means that borrowers on the edge of good credit may get hit in the pocketbook.

“For people in the middle, the people that have decent credit and not much to put down, they’ll pay more for their mortgage over the next 12 months,” he said. “And who knows where it goes from there?”

Empire’s Thomas said the focus on credit scores affects mortgage insurance companies as well – most loans with less than 20 percent down require mortgage insurance.

“Most insurance companies are credit-score driven as well, and therefore some of the loans we might get approved through our investors with a lower credit score, the insurance companies may not approve,” she said.

Market still correcting

Doug Andrews, president of the Greater Springfield Board of Realtors, said he understands the lender reaction to the tough market – and he thinks the response has been appropriate.

“We let too many people qualify for homes that shouldn’t have been qualified to buy at that time,” Andrews said. “Lending institutions cannot assume any more bad loans – some are sitting on huge inventories of failed or failing loans, and they have to have some good loans in there to start balancing things out.”

Dave Tooley, president of Metropolitan National Bank, said his bank’s biggest crop of delinquent loans has been with residential developers, especially builders who are having more difficulty finding buyers for new homes.

“When the economy slows down, certain kinds of builders that build houses to resell into the market are being impacted,” he said. “If they can’t sell the houses, there comes a point in time when the bank has to take action if they don’t pay their interest in a timely way.”

The Federal Reserve has attempted to stimulate home purchases by continuing to reduce interest rates. The federal funds rate was last reduced March 18, when it fell three-quarters of a point to 2.25 percent. Tooley noted that while lower interest rates favor borrowers, they work against depositors. Those depositors move their money to other outlets that offer higher rates of return, further tightening banks’ lending positions.

“Whenever you have a swing in interest rates, there’s a beneficiary, and at this point, it’s the borrower,” Tooley said. “Unfortunately, the depositor is having to take less for their money, and we have to have the depositor to make the loans.”

Beyond housing, Batten noted that real estate experts he has talked to are expressing less desire to sell to speculative developers for raw land, preferring to work with companies that will be the end users of the property.

“That was a huge thing – people were buying dirt and building a strip center, thinking, ‘Build it and they will come,’” Batten said. “Now you’re seeing some pullback in that.”

Forecast: not all gloomy

Despite the tighter standards, area lenders agree that southwest Missouri is not as hard-hit as other parts of the country.

“If you go state by state, you’d find that the really severe loan delinquency rates are concentrated in seven states,” Arvest’s White said. “It’s Michigan, Ohio and Indiana, which are manufacturing states, and California, Florida, Nevada and Arizona, which are the states where homes skyrocketed in value.”

In Missouri, according to the Mortgage Bankers Association, only 1.43 percent of the state’s 900,000 home loans were in foreclosure in the fourth quarter of 2007. States in the Great Lakes region are faring far worse; Ohio’s foreclosure rate was at 3.88 percent of its more than 1.5 million loans.

Tooley added that most of the foreclosures in this area for single-family homeowners are not due to risky lending; rather, they’re due to economic conditions making it harder to pay any mortgage, regardless of the rate.

“It doesn’t matter what the rate is if people don’t have jobs and can’t be out there making money to afford a house,” he said.

Though Springfield’s unemployment rate has increased, it is still better than the figures posted statewide. Springfield’s unemployment rate rose three-tenths of a point to 4.9 percent in February, while the state’s unemployment rate held steady at 6 percent, according to the U.S. Bureau of Labor Statistics.

With low interest rates, lenders agree that there are good deals available – at least for those with strong credit.

“With so many banks in this area and new ones starting, it’s very competitive for the good borrowers,” Guaranty board member Batten said. “Sometimes we have to maybe not take a deal because the rate’s so low, because of competition. Standards have tightened, but if you’re a borrower with good financials and qualifications, you can get a very attractive rate.”[[In-content Ad]]