Subprime Lending Fallout: Fewer No-Money-Down Florida Mortgages

The subprime Florida mortgage crunch is beginning to ensnare even borrowers with solid credit.

Lenders are increasingly refusing to lend to buyers who can’t make a down payment of more than 5 percent, especially if they won’t document their income. Until recently, such borrowers qualified for so-called Alt-A mortgages, which rank between prime and subprime in terms of risk. Last year the category accounted for about 20 percent of the $3 trillion of U.S. mortgages, about the same as subprime loans, according to Credit Suisse Group.

“It’s going to be very difficult, if not impossible, to do a no-money-down loan at any credit score,” said Alex Gemici, president of Parsippany, New Jersey-based mortgage bank Montgomery Mortgage Capital Corp. Companies that buy the loans “are all saying if they haven’t eliminated them yet, they’ll eliminate them shortly.”

Tighter lending standards may slash subprime Florida home loan sales in half this year and Alt A mortgages by a quarter, according to Ivy Zelman, a Credit Suisse analyst in New York who covers homebuilders. The new requirements will force some prospective buyers to save more money for a down payment or risk being denied credit.

Pulling Back
Bear Stearns Cos., General Electric Co.’s WMC Mortgage, Countrywide Financial Corp., IndyMac Bancorp Inc., Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Credit Suisse have all said in the last two weeks they’re pulling back from buying Alt A mortgages sold with no down payment or in a Florida mortgage refinancing of the house’s entire value.

Such companies facilitate the mortgage market by buying loans and repackaging them for sale as bonds to buyers such as insurers and hedge funds.

“We’ve been warned,” said Cheryl Hand, manager of Prudential New Jersey Properties’ office in Manalapan, New Jersey. She said she’s hoping a client of her realty brokerage who’s been approved to buy a home with nothing down won’t have the loan quashed before the closing.

Mortgages are categorized as Alt A when they fall just short of the typical standards of Fannie Mae and Freddie Mac, the two largest U.S. mortgage companies. Some mortgage lenders require a credit score of at least 700 for an Alt A mortgage, while others will accept a score as low as 620. The maximum score is 850.

Besides some Florida home loans requiring no down payment or proof of income, they are often made to buy a second home, a rental unit or to speculate on real estate. Also often falling into the category are loans that are option adjustable-rate mortgages, whose minimum payments can fail to cover the interest owed.

Defaults Rising
Consumers borrowed 100 percent of their home’s value on about 18 percent of Alt A loans made last year, according to Bear Stearns, the largest mortgage-bond underwriter. Another 16 percent had loan-to-value ratios above 90 percent as well as limited documentation, they say. The category comprised about 5 percent of new loans in 2002, according to Credit Suisse.

Late payments of at least 60 days and defaults on Alt A mortgages have risen about as fast as on subprime ones, to about 2.4 percent, according to bond analysts at UBS AG. Loans in the category made to borrowers with low credit scores, equity and documentation are doing about as badly as subprime loans, according to Citigroup Inc. and Bear Stearns analysts.

Rapid credit tightening that’s “been isolated to the subprime world has really migrated” in the past two weeks to Alt A offerings that involve borrowing nearly all of a home’s worth, said Brian Simon, senior vice president at Mount Laurel, New Jersey-based mortgage bank Freedom Mortgage Corp. “We’re just hopeful it will settle down soon.”

SOURCE: Bloomberg News