Lenders tighten rules for riskier borrowers

Bad credit? Actually, you're probably not approved anymore

By STEPHEN BERNARD, Associated Press

Posted Monday, March 17, 2008

NEW YORK -- Bankers and lenders are rapidly changing their requirements as home sales and prices plummet and delinquencies and defaults rise. Problems in the mortgage market are spilling into other lending markets as customers struggle to keep up with payments on other loans, such as auto and credit card payments.

"The market is reinventing itself daily," said Les Berman, owner of Beverly Hills, Calif.-based EB Financial and a director of the California Association of Mortgage Brokers. "I did my first loan in 1971 and have never seen anything like this."

To adjust their standards -- which many critics say grew too lax in the middle of the decade -- lenders are raising minimum credit scores, offering smaller loans and requiring detailed proof of income and assets.

For those who do meet the tightened criteria, a new plan announced Tuesday by the Federal Reserve to provide $200 billion to the financial services sector should mean there will be plenty of money available for borrowers and lower interest rates, said David Wyss, chief economist at Standard & Poor's.

Mortgages have been among the worst performing loans in recent months. More than 16 percent of subprime mortgages -- loans given to customers with poor credit histories -- were delinquent at the end of the third quarter, according to the latest data available from the Mortgage Bankers Association.

In early 2007, customers with credit scores in the low 600s were able to receive mortgages with no down payment and by simply stating their income. Today, a credit score below 680 is a red flag that subjects a prospective homeowner to higher rates and special fees. Credit scores range between 300 and 850, and are determined by a borrower's past ability to repay loans.

"Credit is the gateway right now," said Dan Green, a certified mortgage planning specialist and author of TheMortgage Reports.com. "Weak credit is cost-prohibitive."

And regardless of credit score, customers have to provide proof of income and assets in the bank. Lenders have drastically reduced the amount of money they will lend on any given purchase and also their maximum loan-to-value ratios.

The LTV ratio measures the amount a customer borrows compared with the value of the property. Traditionally LTV ratios did not exceed 80 percent, but during the peak of the housing market, borrowers could take out loans worth more than their houses.

Last year a borrower could get complete financing on a $300,000 home with a mortgage alone or in combination with a home equity loan or line of credit. Today, that same borrower will likely need $60,000 for a down payment or face large fees and higher interest rates.

The easy lending environment of the past few years extended into home equity products, which like mortgages are now seeing banks change their standards as defaults rise.

Tom Kelly, a spokesman for JPMorgan Chase & Co. said that within the past eight months, Chase has focused on combined loan-to-value ratio, documentation and credit scores to improve loan quality, and raised minimum requirements for each. Chase also no longer offers 100 percent CLTV loans anywhere, with restrictions as tight as a maximum 65 percent CLTV in Nevada because of rising delinquencies.

Just as delinquencies and defaults are rising among mortgage and home equity products, problems are mounting for auto lenders as well.

Greg McBride, a senior financial analyst at Bankrate.com, said many auto lenders are requiring larger down payments on loans. In fact, McBride said, changing credit requirements for auto loans are somewhat mirroring changes for home lending, with high credit scores and larger down payments needed to qualify for loans.

"Consumers with a risky profile qualify but for higher rates, if at all," McBride said.

Turner Acceptance Corp., a subprime auto lender that offers loans in Illinois, has ramped up its due diligence while reviewing loan applications, Jonathon Levin, the company's chief executive said. The Chicago-based lender typically works with first-time borrowers or customers with poor credit scores, Levin said.

Since Turner Acceptance works with subprime borrowers, it is increasing its review of loans by requiring additional cross-checking on all parts of a loan, including references.

Even more traditional lenders, such as Hyundai Motor Finance Co., are mindful of loans for customers with spotty credit.

Michael Buckingham, the company's president, has noticed lenders fighting to get high-quality, high-credit customers, lowering rates for top-tier borrowers. Hyundai Motor Finance recently completed a three-month program offering low interest rates to high-quality customers.

"When we have compelling financing, it drives better quality customers," Buckingham said.

With customers struggling to make payments on loans backed by actual assets, credit card lenders have also seen an uptick in losses as fewer people are making payments.

Credit card lenders could write off more than 7 percent of their portfolios this year, compared with the 5.21 percent pace of write-offs in 2007, according to Fitch Ratings.

"We are a little more conservative with our pre-approvals," said Aaron Bresko, director of credit and portfolio management for the Boeing Employees Credit Union.

Also, fewer credit card lenders are approving new applications.

"No question there is tightening in the market," said Robert McKinley, president of Cardweb.com and Cardtrak.com, industry research Web sites. "Approval rates are not as aggressive as they were even three or four months ago."

The volume of direct mailings dropped 10 percent in the fourth quarter, reversing a 10-year trend, said Ben Woolsey, director of marketing and consumer research at Creditcards.com.

The cutback is a clear indication lenders are more selective on who they want to offer cards to, focusing on highly creditworthy customers, he said.

"There's not as much of a shotgun approach," said Woolsey.