Loan standards tighten

Americans are quickly finding out that the turmoil in global credit markets is making it difficult – and in some cases impossible – to buy a home or refinance a mortgage.

Since the beginning of the month, lenders have tightened their standards. They are now very reluctant to make high-risk loans to individuals with spotty credit records. They're also requiring higher down payments, meaning that home buyers need to have much more money saved up. In addition, some Americans – including the self-employed, consultants who work from home, and those with unconventional sources of income – may be denied home loans.

These changes are not just affecting low-income Americans: Many lenders have completely stopped making "jumbo" mortgage loans – anything more than $417,000.

"It's a different ballgame," says Doug Duncan, chief economist for the Mortgage Bankers Association in Washington.

Behind the change is a rapid shift in mentality by investors, many of whom were burned by bankrupt mortgage lenders and rising foreclosure rates. Their angst has rippled through to the securitization market – which packages mortgages into large portfolios that are bought and sold by investors. This provides liquidity for the lenders. Starting a week ago, however, the buyers of these portfolios stopped buying as they questioned the safety of their investments. "It just disappeared," says Mr. Duncan. "There is no question we have a serious liquidity problem in the market today."

The liquidity issue has prompted both the European Central Bank and the Federal Reserve to inject some $300 billion so far into the markets. But the action has yet to help the securitization market. "We are working feverishly to try to find solutions," says Duncan.

In the meantime, banks are tightening standards. On Monday, the Federal Reserve reported that the majority of the 49 banks it periodically surveys had tightened standards on subprime mortgages – loans made to individuals with less than stellar credit. Nearly half the banks also said they had toughened standards for nontraditional mortgages – for individuals who don't have complete documentation of their income or who want interest-only mortgages. Ten percent of the banks even said they had made lending more difficult for people with good credit standing.

To qualify for nonjumbo mortgages, the minimum credit score has jumped from 620 to 680 (out of a top score of 900), says mortgage broker Bob Moulton, president of Americana Mortgage Group in Manhasset, N.Y. "I am seeing a lot of pullback on products and fewer lenders," he adds.

Banks have tightened credit standards, Duncan says, because they want to protect their capital and their earnings. "If they put a security [mortgage] on their books and it trades at a lower value, they have to ... take a hit on their earnings," he explains.

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