by Calculated Risk on 2/08/2007 12:23:00 AM

From the WSJ: Mortgage Refinancing Gets Tougher

... borrowers are getting caught short by a changing housing market -- one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making mortgages easier and easier to get. ...

These new challenges come ... when .... about $1.1 trillion to $1.5 trillion in ARMs ... will face rate increases this year ... The MBA expects borrowers to refinance as much as $700 billion of those mortgages.

"The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp. U.S. Bank is seeing more loans fall through, particularly in markets such as Arizona, California, Colorado and Ohio, where home values have softened. It could be "the tip of the iceberg," Mr. Shanks says.

This probably explains some of the recent increase in the MBA index. Some of these loans are "falling through" and borrowers are having to apply elsewhere.

... there are signs that some lenders are beginning to tighten their standards. ... [as an example] This month, Wells Fargo & Co. will begin reducing by 5% the maximum amount it will lend to certain riskier borrowers in "declining" markets. Those markets, covering more than 150 counties in two dozen states, include parts of California, Florida, Michigan and Ohio.

The change "reflects the tighter requirements of our investors," a Wells spokesman says. "I think all lenders are experiencing this kind of tightening of credit standards."

There is no evidence yet of a general credit crunch, but there is clearly a growing sector–specific crunch in real estate mortgage lending. This credit crunch will make it harder for some people to buy a home. And it will make it harder for some existing homeowners to extract equity from their homes.

"Welcome to Phase II of the housing bust."
ac in the comments, Feb 7, 2007