Loan turmoil closes doors for buyers

ShaRon Lewis is facing a 50% hike in the payment on her adjustable-rate mortgage next month.

This week, she discovered she can’t qualify for a new loan with payments that she could afford.

And although she’s willing to sell the West Hills home she’s owned for two years, she has been told it won’t fetch what she paid for it. “I have to laugh to keep from bawling,” the 30-something Lewis said.

Her situation is becoming increasingly common across the country amid the implosion of the business of sub-prime mortgages -- loans for people with less-than-perfect credit or no credit histories.

Many would-be home buyers, and homeowners who want to refinance, are finding that virtually overnight their status has changed: They no longer are eligible for the kind of easy-credit loans that helped millions of people join the ranks of property owners during the housing boom.

On Friday, Calabasas-based Countrywide Financial Corp., the nation’s No. 1 mortgage lender, told brokers it would stop making adjustable-rate loans covering 100% of a home’s value for customers with low credit scores and unverifiable incomes.

WMC Mortgage, a Burbank-based sub-prime lending unit of General Electric Co., this week also quit making loans for 100% of a home’s purchase price and said it would stop lending to people with very low credit scores.

Susan Bies, a governor of the Federal Reserve, said in a speech Friday in Charlotte, N.C., that the troubles of sub-prime borrowers represented the “front end” of a wave the central bank was monitoring.

“This is not the end; this is the beginning,” she said.

A surge in the number of homeowners defaulting on sub-prime mortgages has triggered the collapse of more than a dozen lenders in recent months.

The latest casualty: Irvine-based New Century Financial Corp., one of the industry’s biggest lenders, said Thursday it would stop taking loan applications because its Wall Street banks had cut off credit.

The company’s stock plunged to an eight-year low amid speculation that New Century would file for bankruptcy protection.

Under pressure from federal banking regulators, lenders that are still standing are shutting out customers they were eagerly embracing just six months ago.

Even some borrowers already in the pipeline are being rejected.

“You don’t know how frustrating it is to [have] a client who was approved for a loan 60 days ago, and then the bank calls to say it won’t honor the deal,” said Philip X. Tirone, a senior loan officer with United Pacific Mortgage in West Los Angeles.

As recently as two months ago, consumers could qualify for a home-purchase loan or a refinancing even if they had low credit scores and no cash for a down payment. Not anymore.

“You’re back to real credit standards,” said Scott Simon, a mortgage expert and money manager at Pacific Investment Management Co. in Newport Beach.

In effect, the industry and new borrowers are paying the price for what many critics say were absurdly generous lending terms in recent years, when In 2005 and 2006, mortgage brokers would joke, “If you can fog a mirror, you can get a home loan.”

Sub-prime loans mushroomed from $213 billion nationally in 2002, or 7.4% of all mortgages, to $665 billion in 2005, a 21.3% market share, according to trade publication Inside B&C; Finance.

The volume in 2006 was $640 billion, or 21.5% of all mortgages -- a level regulators and analysts say was achieved by loosening loan standards amid brutal competition as home sales began to slide.

Now, sub-prime loans made just last year, many of them for the full value of the homes and without proof of borrowers’ incomes, are going into default at a record pace.

For some lenders, nearly 20% of their 2006 sub-prime borrowers are delinquent on payments. And with home prices falling in many parts of the country, many owners can’t use the escape hatch of selling their home at a profit to make good on their loans.

Wall Street investment banks had been voracious buyers of sub-prime loans, packaging them for sale to investors via mortgage-backed bonds. Those same banks now are forcing lenders to take back bad loans, devastating the lenders’ finances.

The jump in lender failures and the shut-off of credit for marginal borrowers were two of the catalysts behind the stock market’s slump last week. This week, even as U.S. market indexes rebounded somewhat, worries about sub-prime loans continued to weigh on investors’ mood.

A key concern: whether the problems of sub-prime lenders and borrowers could drag the economy into recession by causing a broader credit crunch.

Many economists, as well as Fed officials, say they don’t believe that sub-prime borrowers account for a big enough share of the housing market to have a dramatic effect on the economy.

But if mortgage defaults were to rise sharply among higher-quality borrowers, it could spark a much larger problem for the economy by deepening lenders’ caution about new loans.

Mark Cohen, a mortgage broker in West Los Angeles, said some lenders already were toughening standards for the so-called Alt-A group of borrowers: those with solid credit scores but uneven employment history or inconsistent income.

“The question is, is it really limited to sub-prime and Alt-A, or will it go up the food chain?” Cohen asked.

The Fed’s Bies said Friday: “We’re watching for contagion. We haven’t seen it.”

Still, as loan standards tighten for sub-prime and Alt-A borrowers, as many as 1.1 million people could be closed out of the housing market this year, said Dale Westhoff, head of mortgage-backed securities research at brokerage Bear, Stearns & Co., in comments to investors Friday.

That’s the unhappy state in which homeowner Lewis finds herself.

Two years ago, when Lewis was looking for a larger house, she easily prequalified for a nearly $700,000 house even though she had no down payment and a spotty credit record. It helped that she was willing to take on two loans to cover 100% of the cost.

“I wasn’t completely aware of the mortgage terms but I knew it would adjust in two years,” she said. “Properties were still going up at the time, so I felt it might be a good time for me to buy.”

But almost as soon as she and her family moved in, Southern California’s housing market began to cool off, giving Lewis a chill.

“I knew I was in trouble the very next month, and it’s been that way since,” she said. Since mid-2005, home values in her neighborhood have flattened.

Although she has shopped around for a new loan, she can’t find one that would enable her to keep her monthly payment at its current level, around $4,000. And because her house hasn’t risen in value, she can’t use equity as a down payment on a refinancing.

Starting next month, her payment is slated to jump to more than $6,000, an amount she says she won’t be able to pay.

“It’s overwhelming,” said Lewis, who hopes that if she can sell her home within the next few months, she can at least break even after closing costs before she misses too many payments.

“I can completely ruin my credit,” Lewis said. “Or get out the best way I can.”

*

annette.haddad@latimes.com

scott.reckard@latimes.com

Time staff writer Tom Petruno contributed to this report.