Self-Employed Are Frozen Out of MortgagesEfforts to Jump-Start Lending Bypass Those Without W-2s; The Trouble With Jumbos
By
NICK TIMIRAOS and
RUTH SIMONThe government's recent moves to backstop the mortgage market have made it easier for many people with decent credit scores to get a loan. But for many self-employed people -- even those with pristine credit -- the mortgage freeze has yet to thaw.
A reversal of the loose lending practices that led to the banking industry's current woes was certainly expected. But some economists and mortgage brokers say lending standards have become overly restrictive, which could be exacerbating the credit crunch and helping push down home prices further.
Locked Out of a Home LoanSome self-employed professionals are not benefiting from federal moves to loosen the mortgage market.
The volume of jumbo loans -- those that exceed limits for government backing -- fell by more than 70% for the first nine months of the year from a year earlier.
"Underwriting criteria have swung from foolish ease to tighter than any in modern times," says Lou Barnes, a mortgage banker in Boulder, Colo.
The changes are increasingly frustrating a group of borrowers whom banks once coveted: affluent self-employed professionals such as doctors, lawyers, accountants and small-business owners.
Hubert Noguera, a 38-year-old medical-device engineer who also owns a small business, is one of them. He can't get approved for a loan, even though he has a strong 800 credit score and is prepared to make a 40% down payment on a house near San Francisco in the $800,000-to-$900,000 range. Mr. Noguera says he has assets worth three times the $500,000 loan he's requesting and is in the process of selling his share of a recently inherited residence in Saratoga, Calif., worth $1.1 million.
Banks have turned down the loan because the amount he's requesting appears high relative to the portion of his income that he can fully document -- and they won't consider his other income, says his mortgage broker, Connie Madrid.
"My blood type is O positive. What else do they want?" Mr. Noguera recalls asking Ms. Madrid.
The chief problem for self-employed people is that they don't have W-2 forms from an employer to document their full wages. For proof of income, they must rely solely on their income-tax returns. But income for the self-employed is often understated for tax purposes, in part because they tend to take large business-related deductions. Self-employed borrowers who don't take any big deductions won't likely face the same difficulty getting a loan.
"When you're self-employed, the write-offs that you use help at tax time -- but that means when you apply for a loan, your income won't reflect your cash flow," says Richard Redmond, a mortgage broker in Larkspur, Calif. Lenders are also cautious because nonsalaried workers can see greater volatility in their annual income.
In the past, most self-employed people took out "stated-income loans," which don't require borrowers to fully document their income. Such borrowers typically made substantial down payments, had strong credit profiles and paid a slight premium -- around 0.25 percentage point -- on their interest rates. Defaults were low.
That changed as the loans grew in popularity during the housing boom and expanded beyond their traditional market of affluent professionals. Stated-income loans eventually became disparaged as "liar's loans" because borrowers' incomes were frequently exaggerated.
Many banks have eliminated stated-income loans entirely, and
Freddie Mac -- which, with
Fannie Mae, is one of two government-held buyers of mortgages -- will end its stated-income lending program designed for self-employed borrowers next month.
"If the market stays as it is, we've frozen thousands and thousands of good borrowers out of the mortgage market," says Peter Ogilvie, past president of the California Association of Mortgage Brokers. "People who've demonstrated they can pay their bills cannot get a mortgage -- and that's people who have homes."
Mr. Noguera's loan hasn't been approved because he receives part of his income from a human-resources consulting business that he also inherited last year, but lenders won't count income from the firm because he doesn't have two years of reported earnings.
"Six months ago, I know I could have done this no problem," says Ms. Madrid, his broker. She says that even the loan officer at
Wells Fargo & Co., for example, was surprised that the loan couldn't be approved. A Wells Fargo spokesman wouldn't comment on the particular case, but said in a statement: "Like everyone else in financial services, Wells Fargo has adjusted underwriting standards to effectively manage risk in this difficult credit environment."
This part of the market is tightening despite the government's attempts to jump-start mortgage activity. Earlier this year, it approved larger loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration. Last week, the government announced it would buy $600 billion worth of mortgage-backed securities and debt from Fannie and Freddie, which helped push down mortgage rates on government-backed loans by a third of a percentage point.
Self-employed borrowers aren't the only ones finding themselves shut out despite having good credit and savings. Lenders have also sharply tightened requirements for so-called jumbo loans, which are too big to qualify for government backing. That's because banks are relying heavily on loans guaranteed by Fannie and Freddie and the FHA, which have loan limits that vary by market from $417,000 to $729,000. Government-backed lending now accounts for 87% of loan volume, according to Inside Mortgage Finance, a trade publication.
At
J.P. Morgan Chase & Co., for example, more than 95% of mortgage originations are now sold to a government agency. In certain distressed markets, such as South Florida, J.P. Morgan Chase won't go above a 60% loan-to-value on jumbo mortgages. Overall, jumbo-loan originations declined 71% to $87 billion in the first nine months of 2008 from $303 billion during the same period last year, according to Inside Mortgage Finance.
Those who can get a jumbo loan are finding them very expensive. Rates on jumbo loans averaged 7.49% last week, nearly 1.6 percentage points above the rates on loans eligible for government backing, according to HSH Associates, financial publishers in Pompton Plains, N.J. The gap widened from 1.3 percentage points two weeks ago. In July 2007, the gap between the two was as little as 0.25 percentage point.
Mike Castrichini, a chiropractor in Scottsdale, Ariz., has been caught between the tightened jumbo market and the disappearance of stated-income loans, which he says he's used for more than a decade without any problem. He's been unable to find a lender willing to refinance the $900,000 adjustable-rate mortgage on his primary residence, which he says is worth around $1.1 million now, down from $1.8 million a few years ago. "Nobody will touch the loan," says Steve Walsh, his mortgage broker.
The 42-year-old Mr. Castrichini, who has a solid 787 credit score, owns his two offices and a small strip mall in Illinois. Even if he's approved for the loan, he laments the fact that he is facing a much higher interest rate. "I'm going to have to cut back," he says, expressing concern that he'll be unable to keep his children in private school.
Banks, meanwhile, are tightening their requirements beyond those of Fannie and Freddie. J.P. Morgan Chase, for instance, has set tighter standards than the agencies for loans that exceed 80% of the home's value and has stopped making loans for second homes and condos in Florida, according to a recent investor presentation.
"No one wants to be stuck with a loan," says Mr. Walsh, the Arizona broker. He says underwriters he works with have been told they'll be fired if a loan they originate can't be sold to Fannie, Freddie or the FHA.
Lenders have tighter standards than government agencies because they "usually have a more granular understanding of where credit losses are coming from," says Sanjiv Das, chief executive of
Citigroup Inc.'s CitiMortgage unit. Lenders say they are also concerned that Fannie and Freddie will force them to repurchase delinquent loans.
Brokers say there's little borrowers can do to improve their chances of getting a loan right now, but that they can prepare themselves once guidelines ease. The most important steps include maintaining a stellar credit rating and being able to show liquid assets. Borrowers who can't get a jumbo loan will have a better chance at getting a so-called conforming loan -- one not exceeding $417,000, with a higher ceiling in some markets.
Mr. Redmond, the California broker, says he sees enough rejected borrowers with strong credit that he is setting up a $15 million private lending fund targeting those good credit risks. He warns that the inability of creditworthy borrowers to refinance mortgages, particularly those that have rising rates, could spur forced sales and further depress home values.
"Fannie and Freddie can sit on the stoop with buckets of cheap money, but if they have raised the bar too high for the borrowers to get at it, it doesn't matter," he says.
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