Arthur Brito has given up on the idea of buying a house because the qualifying process is so difficult for self-employed people like him. Credit: Kirsten Aguilar / The Chronicle
September 12, 2010|By Robert Selna and Carolyn Said, Chronicle Staff Writers
In 2006, Arthur Brito, a self-employed Bay Area landscape designer, and his wife were prequalified for a $625,000 home loan. After being priced out of the housing market by inflated values, they started looking again last year, but quickly learned that the mortgage crisis had changed their fortunes: They now qualified for a loan of only $280,000.
Brito’s experience illustrates how residential lending practices have shifted dramatically, from a market where high-risk buyers got loans far exceeding their ability to pay to one in which borrowers who are employed and have good credit and a healthy down payment may be out of luck.
“Financially, we are the same people as we were in 2006, so it’s pretty frustrating,” said Brito, 33. “Our incomes haven’t changed, but the rules have changed, so we don’t really talk about buying houses anymore. We’ve shelved it.”
Like Brito, many borrowers are suffering a housing loan hangover precipitated by historically lax lending standards.
In 2006, chicanery driven by avarice infected the mortgage industry food chain: Some mortgage brokers pushed risky loans, borrowers lied about their income, appraisers inflated home values, lenders originated shaky mortgages, Wall Street firms bundled them as securities and sold them, and ratings firms characterized them as safe investments.
At the center of this distorted world was the subprime loan, issued at a high interest rate to borrowers with tarnished credit, checkered employment history and little or no money in the bank. Wall Street firms such as Lehman Bros. traded in the lucrative high-interest loans, which yielded quick profits for brokers who sold them and lenders that originated them.
By 2005, the subprime market was $630 billion a year and growing – triple the $210 billion market in 2002.
Mortgage-backed securities create the liquidity that allow banks to originate mortgages, so they are not going away, but in many respects real estate lending has returned to its more traditional and conservative standards.
Higher standards
Borrowers generally need good credit, relatively large down payments, stable employment and a high percentage of income to debt to get a home loan. Dubious mortgages – with no money down, no documentation of income, adjustable rates that skyrocket after an introductory period – have largely gone by the wayside.
“The bottom line is that we have had a complete reboot of the mortgage lending system in this country,” said Keith Gumbinger, vice president at HSH Associates, a leading publisher of mortgage and consumer loan information…Read More.
