Lenders raise bar for some borrowers

Increasing defaults on high-interest loans force lenders to be more selective

The mortgage industry woes spooking stock markets worldwide are hitting home.

As default rates shoot up and subprime lenders -- those who make high-interest loans to people with shaky credit -- close or scale back, other mortgage lenders are trying to protect themselves.

That means if your credit is poor, or your income erratic, you will find it harder to get a loan to buy a house.

Robin Green is finding out just how hard.

Green, who works at Duke Medical Center, fell in love with a $164,000 house. Even though her credit history suffered from large medical bills and a recent bankruptcy, she was able to get a contract on the home.

Then Green got a call from her mortgage broker telling her things had changed. She would need to increase her credit score substantially or come up with a 5 percent down payment.

"I was like, 'Oh my God, I'm not going to be able to get this house,' " Green said.

Della McDowell, a broker at First Mortgage Source in Durham who is working with Green, said that some of the lenders she uses now want borrowers to have at least two mortgage payments in the bank. Others are asking for canceled checks as proof of paying rent on time. Before, lenders would simply call the landlord and get a verbal confirmation, McDowell said.

Indeed, the past few years have been marked by loose credit requirements that put people into houses with no money down and then allowed them to make only minimum payments.

Such loans fueled the housing boom. But they also came with strings attached. Most had adjustable rates: when the rates climbed, the payments soared. People suddenly found they had bought into a mortgage they couldn't afford. And with the housing market slumping, they couldn't sell or refinance.

Now they're defaulting on their mortgages. Lenders, facing huge losses, are taking action. More than two dozen shut down in the past few weeks. Fremont Mortgage, the second-largest subprime lender in North Carolina, has ended relationships with a third of its mortgage brokers because of high defaults, said Mark Pearce, deputy commissioner of the N.C. Banking Commission. Charlotte-based AmeriTrust Mortgage also closed its subprime unit.

Those that remain are following the stricter lending guidelines suggested by federal regulators and Freddie Mac, which buys a majority of loans. The agency said that it would only accept subprime mortgages where borrowers were qualified at the full amortized rate and that home buyers had to be told all of the costs associated with the loans, including property tax and insurance.

Wells Fargo, for instance, has lowered its maximum debt-to-income ratio -- a key indicator lenders use to determine risk -- from 55 percent to 50 percent, Pearce said. For example, if a home buyer earns $3,000 per month, then his total monthly debt can not exceed $1,500.

The San Francisco company, which is one of the largest mortgage lenders in the state with about 8 percent of the market, has also limited the amount of "no doc" loans it offers. Those loans required little or no documentation of income or assets as well as no money down.

Change affects many

In North Carolina, subprime loans make up nearly 25 percent of the market, said Peter Skillern, executive director of the Community Reinvestment Association, a Durham nonprofit that advocates fairness in lending. Skillern said that figure doesn't include the loans that are made at low introductory rates that later balloon into larger payments.

Many of the mortgages offered by subprime lenders allow borrowers to make minimum monthly payments during the first few years of the loan. They were once sold mainly to investors or others with the means to afford the spike in payments.