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Special section Subprime mortgage industry meltdown

With tighter lending standards and real estate in a slump, buyers with subprime mortgages they can't pay are short on options.

Consumer impact

Lenders tighten standards on subprime

Mortgage lenders are tightening standards for loans to the 15 percent of potential borrowers who have the worst credit.

Even with the more rigorous standards, many credit-impaired borrowers can find willing lenders -- albeit at higher rates than were being quoted as recently as early February.

"I think for the vast majority of people, they don't need to worry about it," says Jim Sahnger, mortgage consultant with Palm Beach Financial Network in Stuart, Fla.

Subprime mortgage meltdown
But a few people have reason to worry. They include homeowners with poor credit histories who want to refinance, but who have less than 5 percent or 10 percent equity in their houses. People with poor or fair credit, and who don't want to verify their incomes or assets, are also finding it more difficult to qualify for loans. Especially if they want to borrow more than 95 percent of the house's value.

The stricter lending standards are the fallout from the subprime mortgage market meltdown. About 15 percent of mortgage borrowers are in the subprime category. Those are the least creditworthy people, with credit scores less than 620 (on a scale of 300 to 850). About 85 percent of mortgage borrowers have credit scores of 620 or higher. So far -- knock on wood -- most of these prime customers needn't worry about being turned down for home loans on the basis of their riskiness as borrowers, so long as they're willing to let the lender verify their incomes and assets.

Several subprime lenders have gone belly up in the past two months because they approved too many loans for borrowers who ended up missing their first or second or third house payment. These are called "early payment defaults." Investors, who buy mortgages on the secondary market, demanded that the lenders buy back loans with early payment defaults. The lenders didn't have enough cash. Some of them, such as Ownit Mortgage Solutions, shut their doors. Others, such as ResMae Mortgage Corp., filed for bankruptcy protection.

Subprime mortgages harder to get
At least 20 subprime lenders have gone the way of Ownit and ResMae since the middle of December. Other subprime lenders, having witnessed their erstwhile competitors swinging from the gallows, are trying to slip the noose by making it slightly harder for people with bad credit to get loans.

"We're certainly starting to see tightening up in underwriting requirements, and they're starting to raise the rates a little more because the loans are risky and the investor community wants higher yield on these loans," says Jeff Lazerson, president of Mortgage Grader, a mortgage brokerage in California.

The stricter standards come in the form of higher minimum credit scores, lower maximum loan amounts and requirements for bigger down payments.

-- Posted: April 18, 2007
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