Just as it has been an up-and-down year for the real estate industry, so it has been a year of "win some, lose some" for America's home buyers.
Lately, most of the marks on consumers' score cards have gone into the loss column.
The bad news for first-time buyers concerns adjustable-rate mortgages. Since the typical ARM starts out with an interest rate far below that of a fixed-rate mortgage, an ARM has long been the only kind of loan cash-strapped borrowers could obtain.
Now, however, a growing number of lenders aren't using those low introductory rates when qualifying potential borrowers. Instead, they're estimating what the rate will be the first time that it is adjusted upward, and then using the higher rate when reviewing the loan application.
Weeding Out Borrowers
As result, thousands of first-time buyers can no longer qualify for a loan, and thousands more are being forced to accept smaller loan amounts.
The tougher standards are designed to weed out marginal borrowers, and, generally, apply to those who make a down payment of less than 20%.
Joel Singer, chief economist for the California Assn. of Realtors, says borrowers who can't qualify for a loan under the new rules should probably hunt for less-expensive homes or try to make a bigger down payment. They could also seek out lenders who aren't using the stricter guidelines, although they could run into financial trouble if their payments soar as soon as the rate is adjusted upward.
Singer can't estimate how many would-be buyers have been knocked out of the housing market by the new rules. But, he adds, the guidelines may benefit some consumers by keeping buyers of modest means from taking on too much debt.
"It won't do you any good to get a loan if you won't be able to pay the money back when the rate goes up a year from now," he says.
The "get-tough" policy on ARMs is exacerbating problems caused by record home prices and rising interest rates. While soaring prices are squeezing home buyers and delighting homeowners, the increase in interest rates is hurting almost everyone.
Most owners with adjustable-rate mortgages are seeing their monthly payments rise, and home-equity loans have become more expensive, too. Of course, higher rates also make it tougher for would-be buyers to purchase a home--and fewer buyers may eventually make it harder for sellers to get their asking price.
Rates on 30-year, fixed-rate loans have climbed to about 10 1/2% from 10% in the spring, according to Compufund, a computerized mortgage network based in Pleasanton, Calif. Introductory rates on ARMs have increased to about 8 1/2% from 8%.
A Mild Damper
The half-point rise has added about $40 to the monthly payment on a $100,000 loan. Most economists predict that things are going to get worse before they get better.
"I think we'll see rates gradually climb upward through the end of the year . . . rising about three-quarters of a point from where they are now," says John Tuccillo, chief economist of the National Assn. of Realtors.
Still, the expected increase should put only a mild damper on the nation's hot housing market. "There's a shortage of homes for sale in Southern California and some other parts of the country, and that's one reason why prices have been rising so fast," Tuccillo says. "I think most people realize that it doesn't pay to wait for rates to come back down a half-point or so when prices are rising 10% or 20%."
While many lenders are getting tough on first-time buyers, they're making life easier for folks who can make big down payments.
The latest loan catering to big spenders: "low-documentation" loans, sometimes called "low-doc" or "no-qualifying" mortgages. Borrowers who select this kind of loan don't have to provide previous tax returns and the usual ream of other financial documents. Instead, a couple of paycheck stubs or a single bank statement may suffice.
A few lenders simply require a satisfactory credit report that can be obtained in a few minutes.
The catch--and it's a big one--is that low-doc borrowers must usually make a down payment of at least 25%. Some lenders require a minimum 30% down.
No Borrower Defaulted
The large down payment reduces the chances of the borrower defaulting, and virtually assures that the lender will be able to get all its money back if it must eventually foreclose.
"We've made more than 1,000 of these loans, and not a single one has gone into default," says Martin Stroiman of San Diego-based Builders Funding Corp., one of the few lenders making the loans to borrowers who put just 20% down.
Despite their hefty down-payment requirement, low-doc loans are catching on. "They're appealing to a lot of buyers who don't have 9-to-5 jobs and regular paychecks, like people in the arts and entertainment business," says Richard Rosenthal, a Westside real estate broker. "By choosing this kind of loan, they can get the money even if they aren't currently employed."