Aug. 3 (Bloomberg) -- U.S. mortgage lenders such as Wells Fargo & Co. and Wachovia Corp. are raising rates and imposing stricter standards on some of their most creditworthy borrowers as slumping demand in the mortgage bond market chokes off funding.

San Francisco-based Wells Fargo, the second-biggest U.S. home lender, curbed its funding of Alt-A loans, made to some borrowers with good credit ratings who don't document income or buyers of second homes. Charlotte, North Carolina-based Wachovia, the fourth-largest U.S. bank, stopped making Alt-A loans through brokers and smaller lenders and curtailed some adjustable-rate mortgages, spokeswoman Christy Phillips-Brown said.

``The credit crunch is here,'' said Keith Shaughnessy, president of Foundation Mortgage Corp. in Littleton, Massachusetts.

Making it tougher for the most creditworthy borrowers to get mortgages may worsen the two-year-old housing slump and threaten U.S. economic growth by reducing the number of people who can buy houses or how much they can afford to pay. Pasadena, California- based IndyMac Bancorp Inc., the ninth-biggest home lender, is making ``major changes'' after the market for mortgage bonds became ``panicked and illiquid,'' Chief Executive Officer Michael Perry told staff in an e-mail this week.

Stocks, Bonds

Credit Suisse Group, Switzerland's second largest bank, today told lenders that sell it loans that ``until further notice'' it no longer wants any subprime loans, second mortgages, option ARMs whose minimum payments increase a loan's principal, or ARMs with only two or three years of an introductory fixed rate, according to a letter sent to mortgage originators. Karen Laureano- Rikardsen, a Credit Suisse spokeswoman, declined to comment.

About $11.2 billion of ``non-agency'' mortgage bonds, meaning ones not guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, were sold in July, according to Michael D. Youngblood, portfolio manager and analyst at Friedman Billings Ramsey Group Inc. of Arlington, Virginia. That's down from $41.6 billion in June and a monthly average of $86.6 billion this year.

Lenders are pulling back on the types of loans they'll make because demand is plunging for home-loans securities not guaranteed by Washington-based Fannie Mae and McLean, Virginia- based Freddie Mac, as well as government agency Ginnie Mae, also based in Washington. The companies were chartered by the U.S. government to expand mortgage financing, and own or guarantee about 40 percent of U.S. residential mortgage debt.

Spreads Widen

Spreads on AAA rated securities backed by prime ``jumbo'' and Alt-A loans are at the widest in ``several years,'' according to a report today from analysts at Deutsche Bank Ag. Yields over benchmarks on bonds of adjustable-rate mortgages with rates fixed at 5.5 percent for five years rose to 0.70 percentage points, up from a month-low of 0.31 percentage points, the firm said.

The Standard and Poor's 500 Thrifts & Mortgage Finance Index that includes Calabasas, California-based Countrywide Financial Corp. and Seattle-based Washington Mutual Inc., the first and third largest home lenders last year according to newsletter Inside Mortgage Finance, fell 6.4 percent in the last three days to a two-year low after dropping 11 percent in July.

Wells Fargo shares dropped $1.61, or 4.7 percent, to $32.81 in New York Stock Exchange composite trading at 4 p.m. Countrywide fell $1.77 to $25, almost half the record high of $45.03 it set on Feb. 2, and IndyMac dropped $1.39 to $19.66. The bank's stock is down 56 percent this year.

`Skin in the Game'

AmTrust Financial Corp., the former Ohio Savings Bank that makes more than $2 billion a month in mortgages, today stopped making loans that exceed 95 percent of a home's value. The change applies to jumbo mortgages, above the $417,000 limit set for loans bought by Fannie Mae and Freddie Mac, as well as mortgages the bank intends to hold in its portfolio.

``Borrowers have to have skin in the game,'' said Robert Eisendrath, a senior vice president for AmTrust. Any changes being made by lenders now may be temporary, he said.

Wells Fargo Home Mortgage still makes Alt-A mortgages directly to borrowers and through brokers, though it has stopped buying them from smaller lenders, said Brad Blackwell, executive vice president for retail sales at Wells Fargo Home Mortgage.

``On the retail side we have been mostly business as usual,'' partly because ``we have the balance sheet to hold these loans until the market gets stronger,'' Blackwell said. The lender suspended Alt-A lending through brokers this week, spokesman Kevin Waetke said.

Jumbo Mortgages

Almost all mortgages are jumbo in some of the U.S.'s most expensive markets. In San Jose the median price for single-family home was $788,000 in the first quarter, according to the National Association of Realtors. San Francisco's median was $748,000 and California's Orange County was $697,300. The suburbs north and west of Manhattan are the East Coast's most expensive single- family market, with a median of $521,400.

Memphis, Tennessee-based First Horizon has raised rates ``significantly'' on Alt-A and jumbo loans in the past two weeks, said Pete Makowiecki, the head of its mortgage unit.

``We're effectively curtailing our volume through price as opposed to some grandiose statement that we're pulling out of wholesale Alt-A completely, because it will come back,'' he said.

GMAC LLC, the lender formerly owned by General Motors Corp., has also dropped some Alt-A ARMs, said Stephen Dupont, a spokesman. Cleveland-based National City Corp., the 12th-biggest U.S. bank by assets, this week stopped buying second mortgages from other lenders and making some stated-income loans.

`While You Can'

Greg Nierenberg, branch manager of closely held Approved Capital Mortgage Inc., a Woodland Hills, California-based mortgage broker that handles about $100 million in loans a year, said he receives daily emails from lenders warning of tightening lending standards.

``Good Morning, please get in your 90 percent stated income files before we reduce our guidelines on Monday,'' stated an e- mail he received today from Chase Home Equity. ``Get them in while you can.''

Washington Mutual yesterday told brokers and companies that sell mortgages that they can no longer use its software to lock in prices after 5 p.m., according to Alan Gulick, a spokesman. He wouldn't discuss other changes.

``This is probably the most dramatic I've seen in my career,'' said Nierenberg, commenting on changes in the industry he's worked in since the late 1980s. ``Their own reps from their own lenders don't even know what they can do from day to day.''

Last Day

Today is the last day of work for 6,250 of the 7,000 employees at American Home Mortgage Investment Corp., a lender that dealt in prime and Alt-A loans. Last week, investors and lenders pulled the plug on at least $750 million of home loans promised by Melville, New York-based American Home to thousands of now-stranded borrowers.

Consumer spending in the U.S., which accounts for about 70 percent of the economy, is slowing as the two-year-old housing slump saps confidence and leaves homeowners with less money to spend. The spending rate was 1.3 percent at an annual pace in the second quarter, the weakest in more than a year and the second- lowest since the 1 percent seen in the midst of the 2001 recession.

To contact the reporters on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: August 3, 2007 18:42 EDT