Mortgage crisis: Home loans are harder to get

Wake-up call! If you're ready to buy or refinance a home, the turmoil on Wall Street may be further hurting your chances of getting a loan.

In a huge sell-off Friday, investors reacted to a mortgage industry crisis not seen in decades.

Some lenders are shutting down, laying off thousands of employees and leaving buyers in the lurch. Interest rates and the terms of loan offers are changing daily. And borrowers with tarnished credit are facing deal-killing loan terms — if they can find a loan at all.

Stock investors' wariness about the housing market spilled over Friday, driving a 281-point loss in the Dow Jones industrial average.

While poor repayment of "subprime" loans to borrowers with blemished credit is the primary concern, there are a few signs that more blue-chip borrowers are also having problems paying their mortgages.

Lenders are quickly closing the door to borrowers with low credit scores, small down payments for a new home or little equity in their current homes. Homeowners and buyers in high-cost areas such as California, Florida and the Northeast are also reeling as lenders chop "jumbo loan" programs.

"The market for virtually any loans with the slightest element of risk has effectively disappeared," John Bollman, an executive vice president at Cleveland-based National City Mortgage, wrote to his employees.

In explaining the company's latest pricing and product changes that will weed out some of these borrowers, he said, "I have been a mortgage banker for 20 years and have never seen such a severe reaction to credit risks in the market place … (and) things may even get worse before they get better."

On Monday, the mortgage company's parent, National City Bank, said it has stopped taking applications for home equity loans and lines of credit as problems in the mortgage industry continue to spread.

"This is one of a number of steps National City has taken in recent weeks to help ensure that originations are in line with existing and anticipated market conditions," the company said. "We are continuing to closely monitor the market and take the appropriate steps to best navigate market conditions."

Sam Molinaro, chief financial officer for investment bank Bear Stearns bsc, which has suffered huge losses investing in risky mortgage loans, said the upheaval in the mortgage market is on the same scale as the fallout from the tech-stock bubble in 2000 and the stock market collapse in the 1980s.

Part of the cause is that in June, the Federal Reserve issued guidance for lenders offering adjustable-rate mortgages. Since then, most of the large lenders, including Countrywide and Wells Fargo, have eliminated ARMs that had low "teaser" rates that were fixed for the first two or three years, then began to rise — often above what the homeowner could afford.

While everyone agrees these more prudent lending standards should ensure future borrowers can afford to keep their homes over the life of the loan, many homeowners who got those loans in the past few years are now having grave problems refinancing as their interest rate rises.

Patrick Jones, a 49-year-old baker in the Denver area, bought his home three years ago and has paid his mortgage on time every month.

This month, his adjustable-rate loan reset for the first time, to $1,800, up $450. Loan terms in the current market mean that he can't get relief if he were to refinance.

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