As the number of delinquent mortgages climbs, lenders are tightening their standards for issuing loans, including such well-publicized moves as raising minimum credit scores and cutting back on 100 percent financing and low-documentation loans. The trend appears to be here to stay, at least for the foreseeable future.

A tremendous increase in foreclosures across America has prompted changes in mortgage lending standards that are already having a chilling effect on borrowers. Members of the Senate Banking Committee have encouraged Fed Chairman Ben Bernanke to require all lenders to more carefully assess a borrower's ability to repay before approving home loans. Bernanke acknowledges that he's considering tougher rules to crack down on abusive practices by mortgage lenders, and is reviewing many options. The Fed is considering more stringent disclosure requirements, for example, and may soon issue tougher underwriting rules.

Lenders on the defensive

Many mortgage companies can see the writing on the wall, and much of it's written in red ink. Consequently, they're taking proactive steps to avoid further loan losses or government intervention. One change is a much closer look at a would-be borrower's finances, checking twice as far back into a prospect's credit history to look for red flags. Instead of reviewing only the last year of a potential borrower's payment history, they're now researching a full 24 months. They're also tightening requirements for the self-employed, and considering such data as how long one's been in a particular line of work, and how much others in that industry earn, on average, annually.

Spouses: Separate, but not equal

Many lenders are even treating the credit scores of married couples differently. This will make it more difficult for some couples to get approved for a mortgage. In recent years, a couple would have been able to use the credit score of the partner with the highest rating. Now, lenders are scrutinizing both spouses, and are inclined to base decisions on the lowest score.

Reappraising appraisals

Mortgage companies are beginning to take a more skeptical view of the value of the property that the loan will be used to purchase. One of the most surprising changes involves the way in which lenders perform property appraisals. Instead of relying solely on a single appraisal, lenders are sometimes requiring two different ones, and accepting the lower of the two. They're also using independent real estate brokers to evaluate the market value of homes. If these so-called "broker price opinions" (BPOs) don't support the prices arrived at by appraisers, the lenders may reject the loan.

Increased scrutiny by lenders is intended to screen out problem loans and reduce mortgage fraud and loan defaults; but sometimes, the pendulum swings to extremes. Recently, lenders have been too liberal. Now it appears that they're becoming too conservative and strict about loan applications. This will reverse the trend of easy money, at least for the time being. Juvenile delinquency has long been a social problem; lenders are now determined that loan delinquency doesn't become a similar concern.

Published on May 31, 2007