James Bregenzer, a 31-year-old marketing strategist in Chicago, was rejected for a mortgage in May after successfully financing two previous home purchases. The hitch this time: his monthly payment would have been $100 more than the lender was willing to approve.
Bregenzer is in good company. Standards in the U.S. are so high and inflexible that former Federal Reserve Chairman Ben S. Bernanke, now a Brookings Institute fellow-in-residence with a net worth of at least $1.1 million, said at a conference last week that he couldn’t refinance his house in Washington. Even some doctors struggle to get home loans if they’re self-employed.
“We asked if we could go over by $100 and were told that’s just not going to work,” said Bregenzer, who bought his first home before getting married in 2008. “The process of buying a home used to be stupid easy. Now, my wife and I were buying a home with two salaries, we make a heck of a lot more than I used to, and I have to go into great and terrible detail to show documentation.”
Lenders are continuing to tighten the credit vise on homebuyers after five straight years of economic expansion, imposing the toughest standards since at least 1998, according to a new index by CoreLogic Inc. In May, credit availability for all home loans was half of what it was in the late 1990s, when the housing market was making steady gains much like today, according to the Housing Credit Index. Banks are less likely to overlook periodic shifts in income or brief credit lapses in adopting rigid rules to avoid losses after the housing crash, leaving creditworthy Americans without financing.
“It is clear that credit is quite tight relative to normal,” said Mark Fleming, chief economist at Irvine, California-based CoreLogic. While banks shouldn’t revert to the loose credit standards of the housing bubble, it’s possible for lenders to expand credit while still being prudent, as they did in the late 1990s, he said.
The Corelogic gauge uses 1998 as a baseline and considers six characteristics, including the share of borrowers with low credit scores, small down payments and high debt relative to income, along with the number of mortgage brokers and adjustable-rate loans.
While federal programs for struggling homeowners have helped to boost refinancing, credit availability for home purchases in May was about a third of what it was in 1998, according to the index. The housing market 16 years ago was growing moderately much like it has this year: Prices rose 5.3 percent in 1998 from the year earlier, according to data from the National Association of Realtors.
Mortgage purchase applications last week fell 43 percent from October 1998, according to a Mortgage Bankers Association index released today.
Professionals with established careers whose earnings fluctuate may no longer be considered good credit risks and are having trouble getting conventional financing. This includes self-employed professionals, doctors with their own practices and nurses who cannot show two years with an employer because they’ve shifted jobs multiple times, said Michael Slavin, chief executive officer of Privlo Inc., an online provider of real estate loans for borrowers with complex finances.
Slavin said some of the employees of the hedge funds and venture capital firms that finance his company’s mortgages have told him they’ve been rejected by lenders.
“It’s very hard to justify or come up with appropriate documentation -- it’s not clear what documentation needs to be for someone with variable income,” CoreLogic’s Fleming said. “That happens at the low end of the income distribution and at the high end.”
Bernanke, who is no longer on the Fed payroll, has a net worth of $1.1 million to $2.3 million, and income of $150,000 to $1.1 million from textbook royalties in 2013, according to disclosure forms he filed this year as he was leaving the Fed.
“I recently tried to refinance my mortgage and I was unsuccessful in doing so,” the former Fed chairman said in a speech in Chicago.
He has a 30-year mortgage with a 4.25 percent interest rate, according to his financial disclosures and other public records. He’s already refinanced twice since buying the Capitol Hill rowhouse in May 2004, land records show.
“It’s entirely possible” that lenders “may have gone a little bit too far on mortgage credit conditions,” he told a conference of the National Investment Center for Seniors Housing and Care.
Bregenzer said he and his wife, Katie, who also works in marketing, were told by Shelter Mortgage that it wouldn’t fund the loan they needed in May, about four months before their son, Andy, was born. Greater Lakes Credit Union, a local lender in North Chicago, gave the couple a 30-year fixed mortgage. The Bregenzers provided a down payment of $60,000 for the $470,000 four-bedroom home, which they purchased in July.
Their monthly payment is $3,100, including taxes and insurance, said Bregenzer, who owns a private equity firm in addition to working full-time in marketing.
“Buying a home now is very difficult,” Bregenzer said. “The rules are very, very strict.”
Philip LaGiglia, director of mortgage services at Great Lakes Credit Union, said the nonprofit group’s lower fees and rates let it keep payments down and distribute loans more widely.
“I’ve been in the mortgage lending industry for 23 years and in no time has it been more difficult than right now,” LaGiglia said.
A spokesman for Milwaukee-based Shelter Mortgage declined to comment.
During the housing bubble in early 2005, credit for buying homes was at its loosest, more than twice as available as in 1998, according to the index.
Lenders raised standards after the 2008 housing collapse compelled the government to rescue Fannie Mae and Freddie Mac and the companies forced banks to buy back bad loans from them with underwriting errors. Lenders are getting penalized for “non-material minor foot faults,” said David Stevens, president of the Mortgage Bankers Association and former head of the Federal Housing Administration.
Today, about 10 percent of borrowers with purchase loans have a FICO credit score of 660 or below, on a scale of 350 to 850, compared with about 20 percent in 2001, according to Taz George, an Urban Institute researcher. While low down payment mortgages have become more common, borrowing now requires more pristine credit, George said.
“What you have to do if you’re a lender today is to lend defensively,” Stevens said. “The sifter plucks out anything that has a story to it that you might have to defend sometime in the future. It’s risk avoidance in the extreme.”
Anthony B. Sanders, an economics professor at George Mason University in Fairfax, Virginia, said the main issue in the housing market is the income of borrowers, not the standards of lenders. He said the subprime collapse in 2008 damaged the finances of borrowers and that incomes, particularly for low-wage workers, have been stagnant.
“If you loosen up credit standards, there isn’t sufficient income to restart the fire,” Sanders said. “What you’d have to do is lower credit standards so much that it would be adverse to the economy if we had another default crisis.”
Julian Castro, who became Secretary of the Department of Housing and Urban Development in July, has said the FHA is working with lenders to ease credit by making it clearer when they’ll have to absorb the costs of soured loans.
“Policymakers are cognizant that the pendulum has swung too far toward restricting credit availability and there’s a concerted effort to expand the credit box in the weeks and months ahead,” said Isaac Boltansky, an analyst at Compass Point Research & Trading LLC in Washington.
Lenders have further tightened the availability of mortgages for purchases 22 percent in the first five months of this year, according to the index.
“In good times, everybody is optimistic and neglects the downside risk,” said Itzhak Ben-David, finance professor at the Fisher College of Business at Ohio State University. “After a major shock, people are too cautious. Nobody wants to have the risk of holding the hot potato.”