Nearly 25% of mortgage applications rejected

Posted April 6 at 6:01 a.m.

During the housing boom, anyone who could fog a mirror could get a mortgage. Today, only highly qualified borrowers can get financing — let alone the best rates. The latest data from the Federal Reserve shows that nearly a quarter of people who apply for loans are turned down.

“Good borrowers with one or two blemishes on their credit are being denied credit,“ said Lawrence Yun, chief economist for the National Association of Realtors.

The denial rates tell only half the story. Many potential buyers aren’t even applying for loans because they assume they can’t get one — even with good credit.

“A lot of people know it’s very difficult to get a mortgage and they’re not even trying,“ said Alan Rosenbaum, CEO of GuardHill Financial, a New York-based mortgage broker.

That shows up in statistics on credit scores for loans financed with backing from Fannie Mae and Freddie Mac. The average credit score has risen to 760 from 720 a few years ago. For FHA loans, the average score has gone to 700 from 660. Loans made to borrowers with sub-620 scores are almost nonexistent.

Another factor keeping people out of the mortgage market is that lenders now require much more up-front cash. The median down payment for purchase is about 15 percent. During the boom, it approached zero.

On most loans, banks want 20 percent down. On $200,000 purchases, that’s $40,000, an insurmountable obstacle for many young house hunters. Or, in New York City, where the median home price is $800,000, buyers need $160,000 up front.

Industry insiders say all these factors have reduced the pool of buyers, lowering demand for homes and hurting prices.

“We feel it really reduces the demand for houses,“ said Mike D’Alonzo, president of the National Association of Mortgage Brokers. “It’s an unbelievable buyer’s market, but there hasn’t been as much activity as you would expect because not as many people qualify for loans.“

Jerry Howard, CEO of the National Association of Home Builders said, “You only have to look at the recent sales reports to see what the impact of the credit crunch has had. The statistics speak for themselves.“

New home sales in February were at an annualized rate of $250,000, a 40-year low; sales of existing homes, despite very affordable prices, were 30% off their peak; and home prices fell for the sixth consecutive month in January.

Anthony Sanders, director of Real Estate Entrepreneurship at George Mason University, speculates the tougher credit standards may have stripped as much as 30 percent of the buyers — or more — off the market, compared with normal times.

And it’s about to get harder for buyers. Federal regulators proposed rules last week that are designed to discourage risky lending but that will also likely further restrict lending.

Banks would be required to keep 5 percent of some loans, specifically those with less than 20 percent down payments, on their books rather than selling them all off as securities. As a result, banks make be unlikely to issue loans where less than 20 percent is put down. So much for first-time buyers.

“We think the new rules are appalling,“ said the NAHB’s Howard. “Only the wealthy will be able to buy homes at low interest cost.“

It could also further erode consumer demand for homes.

“It’s disturbing,“ said Lennox Scott, head of John LA. Scott Real estate in the Pacific Northwest. “We’re just starting to feel healthier in inventory levels and prices and this is a potential headwind.“

The immediate impact, should the new regulations get adopted, should be minor, according to Steve O’Connor, spokesman for the Mortgage Bankers Association. That’s because Fannie, Freddie and FHA loans are all exempt from the requirements and they represent more than 90 percent of the market right now.

The government, however, wants to reduce the presence of all three agencies in favor of private lenders, and banking experts fears the long-term impact of abandoning the field to mostly private companies.

“For the first time in 100 years,“ said Howard, “the government is discouraging you. It’s saying ‘We intend to make it more difficult for you and your kids to buy homes.’“



  1. Chad April 6 at 9:01 a.m.

    I have been in the mortgage lending industry for 15yrs, and yes, it does require higher scores compared to 5 years ago. However, I take exception to the comment that “Good borrowers with one or two blemishes on their credit are being denied credit”. That is not the case. Most of the people that I see that are not qualified have much worse credit than what this article implies. FHA is a good option for those who do not have perfect credit.
    Do we really want to go down the road that got us in the mess that we are in now?

  2. Mike Schmelzle April 6 at 9:35 a.m.

    I agree with Chad, I have been in mortgage origination since 1979. The reason we are in this mess today is because home buyers didn’t have to put any “skin in the game”.
    “0″ down payment loans, negative amortization, interest only, and no-income or asset loans created the problems.
    If a home owner has no financial interest (money in the transaction) it is very easy to walk away. This is what happened.

    I am very pleased that the industry is starting to recognize that everyone will have to have “skin in the game”. If potential home buyers have to wait a little longer to save money to put 20% down, the industry will be better off.

    A question for the general tax payer, “Would you lend someone $100,000 (your own money)to purchase a $100,000 home, with 620 credit scores?

    Thank goodness we have come to our senses and are getting back to prudent underwriting.

  3. CS April 6 at 11:27 a.m.

    According to FBI reports on mortgage fraud, white collar crime, and financial crimes, from the early 2000’s, the agency warned that mortgage fraud could take out the economy and that 80% of the time it was done by industry insiders. And, one could certainly argue that the remaining 20% had to require, at the least, lack of due diligence on the part of the industry, since those working in the field had the knowledge and resources to verify income, ID, etc.

    The “home buyers” as a group didn’t have the skill or connections to pull it off by themselves. They didn’t create, approve, and then resell, toxic loans…they just foolisly signed papers to get them. In some instances, industry insiders forged or switched paperwork.

    Many small potato insiders have been charged with crimes; large companies tend to just pay a fine and keep going. But those in the industry who paid any consequences pale in comparison to the many consumers who lost a house and had their credit ruined.

    And let’s not forget or omit that the homebuilding industry played a huge role in this; besides overbuilding, the industry set up it’s own mortgage firms and got right in on predatory and illegal lending. When homeowners found themselves unable to keep up payments on a house they overpaid for, and that was in many instances also poorly built, it is no wonder they walked away and no wonder so many of the foreclosures are in new developments.

    I’ve read of so many seemingly huge fines for big companies who were engaged in predatory lending but they’re still doing it. Obviously fines don’t work. Small fry go to jail, why not the CEO’s of banks and builders? Where are the consequences for the CEO’s who authorized crime for personal gain?

  4. Jerry April 6 at 11:48 a.m.

    Mike, I agree that skin in the game is valuable but not mandatory for a good loan to be written. VA loans are 100% and they have a very low default rate. I think it is more to do with discipline and character than ’skin’. Maybe those borrowers that don’t have 20% down should go to boot camp :)

  5. Sam April 10 at 8:25 a.m.

    So what company help the small fry that owns his own home an its paid for and newly remodeled? The only problem is he has bad credit an high property taxes?