The dream of owning a home is fading away for many Americans with less than stellar credit.
On Tuesday HomeBanc Corp. said it will not issue any more loans, and Impac Mortgage Holdings Inc. shut down a type of loan called “alt-A” for people with limited documentation or slight credit issues.
That followed bankruptcies for two of the country’s biggest home lenders — American Home Mortgage Investment Corp. and New Century Financial Corp. — and tighter terms at most other lenders that are thus far surviving a shakeout in the industry.
“Every day I hear about a number of lenders that are reducing their products,” said George Hanzimanolis, president of the National Association of Mortgage Brokers. “It is going to take a while before the dust settles.”
Stocks of many surviving lenders are at multiyear lows, and it is common to find shares in the industry that have lost 90 percent of their value in the past six months, or even weeks.
The shocks to the industry are siphoning lenders and cash away from the market, which reduces competition and restricts people’s access to home loans.
Hanzimanolis said lenders have raised the minimum credit score that qualifies for financing. Most lenders now require bigger down payments, he said, and are eliminating exotic loans or making them more difficult to qualify for.
The silver lining is that people with good credit who can document their income have the same access to home loans as they did a year ago.
Richard Belling, president and chief executive of Community Financial Group Mortgage, said his bank has not scaled back its lending. The Grafton, Wis.-based lender does not issue “subprime” loans, or loans to people with checkered credit histories, and Belling said the bank’s prime mortgage products “are still pretty much as available as they have always been.”
The reason marginal borrowers are being cut off from credit or being charged a lot more, while the market for “vanilla” mortgages is unscathed, stems from the buckling of a multitrillion dollar industry hatched on Wall Street.
The market for investments backed by mortgage debt — including bonds backed by home loans and a complex, risk-splicing security known as a collateralized debt obligation — has exploded in the past few years.
Investors bought more than $2 trillion in mortgage-backed securities last year, according to the Securities Industry and Financial Markets Association. Issuance of mortgage-backed securities in the past five years was more than double the issuance in the preceding five years.
With lenders accessing all that cash and competing for business, many eased their standards. By funneling so much cash into the industry, these financing markets encouraged lenders to offer a slew of exotic loans that stretched what had been the limits of past lending standards.
Now, snakebit by a cold housing market and a breakdown in credit quality, these financing markets are in shock. Prices for bonds backed by mortgage debt have tumbled, and there are few if any buyers for CDOs.
“It is pretty bad,” said Joyce DeLucca, founder and managing principal at Kingsland Capital, which manages $2 billion in low-grade assets and credit vehicles. “In many cases, you have the complete absence of buyers. ... The demand for the assets has kind of disappeared from the market.”
The difference between lenders that are closing down and banks that continue to offer loans at the same prices comes down to whether the lender relies upon Wall Street for financing.
Banks that raise their own capital are surviving. Because of the turmoil in the credit markets, lenders that rely on investment banks are being cut off.
“We have already seen quite a retrenchment in the availability of mortgages for subprime borrowers,” said Sal Guatieri, senior economist at BMO Capital Markets. “There certainly will be less funds available because investors are pulling back. ... Suffice to say it will be increasingly difficult to get a mortgage at a fairly low rate unless you have pristine credit ratings.”