by Calculated Risk on 10/03/2005 12:11:00 PM

From the WSJ: Mortgage lenders tighten loan standards (hat tip: Bailey and pwilliamson)

After years of easy money, some mortgage lenders are beginning to tighten their standards.

Lenders have rolled out a raft of mortgage products in recent years that have made housing purchases more affordable and allowed many people to extract cash from their homes' equity without boosting their monthly payments.

Now, in what could be the first signs of a reversal, some lenders are starting to raise the bar on making these products available to new borrowers.

The article mentions that rates are rising and offers examples of some lenders tightening lending standards. Some examples:

Two weeks ago, Washington Mutual, one of the nation's biggest mortgage lenders, told mortgage brokers that it will make it more difficult for borrowers to qualify for its option ARMs, which carry an introductory rate of as low as 1.25 percent. Under the new rules, which are expected to take effect next month, borrowers will have to show they can afford the monthly payment if the interest rate on the loan is 6 percent - or 6.25 percent for borrowers purchasing a second-home or investment property - after the introductory rate expires. Currently, the bank's rate for qualifying borrowers for these loans is roughly 5.25 percent.

New Century Financial Corp., a mortgage lender in Irvine, the same week said it was aiming to reduce the amount of interest-only loans it grants to less than 25 percent of total loan production from 33 percent in the year's first half. New Century said it was making the move in an effort to boost profit margins.

Some lenders are making their loans more costly, which could discourage borrowing. Last month, Option One Mortgage, a unit of H&R Block Inc., boosted the rates on all of its mortgage products by 0.40 percentage point. Option One says the move reflects both rising interest rates and changes in investor appetite for its loans.
...
Among other changes, Countrywide Financial, another big lender, earlier this month made it tougher for borrowers to qualify for a 1 percent teaser rate on its option ARMs. Countrywide now considers a number of factors in setting the introductory rate, including the size of the loan, how much documentation the borrower provides and whether the property is a second home or for investment. The teaser rate for borrowers with multiple risk factors can be as high as 3 percent, the company says.

These are small steps in the right direction but probably too little, too late. In the comments to the previous post, Tanta is "underwhelmed":

" ... this strikes me as the usual "find a couple of examples and make it sound like a trend" crap the press is so good at.

Of the four lenders mentioned in this article, exactly one is a regulated financial institution: WAMU. And WAMU's big tightening is . . . 100 bps increase on the qualifying rate. I'm underwhelmed.

Two of the other four lenders are subprime. New Century is a REIT. Option One is owned by H&R Block. And Option One is "tightening standards" by repricing its rate sheet by 40 bps? When they came right out and said that part of the reason for that is that, well, market rates are going up?

The last is Countrywide. In my view they're the only ones listed here doing anything actually meaningful: they're upping the start rate on loans with a lot of layered risk, which means that if the borrower chooses the neg am option, it will negatively amortize more slowly. Still, this is adjusting the price for the risk you're taking on, not limiting the risk by changing the underwriting guidelines.
...
if this is the best the Wall Street Journal could come up with, we haven't even skimmed the surface yet.

And even with these "tighter standards" and rising rates, the number of mortgage applications is still strong. Fannie Mae Chief Economist David Berson, writing in his weekly economic commentary, still sees a strong housing market based on new loan applications: Housing: The good, the bad, and the ugly.

"...the Mortgage Bankers Association’s (MBA) weekly survey of mortgage applications (for home purchases) provides a pretty good leading indicator for home sales one-to-three months ahead. Purchase applications had risen to record highs in each of May, June, and July -- helping to power new and existing home sales to either high or record sales in those months. There was a small decline in August (reflected in the dip in August new home sales), but purchase applications have increased again thus far in September. In fact, purchase applications have climbed to a record high in September, presaging strong home sales figures for the September-November period."

Berson also comments on rising inventories as a potential problem for housing - and I think rising inventories are the first sign of a slowing housing market. But I don't think we have seen any real tightening in lending standards as suggested in the WSJ article.