A Challenge for Borrowers

Mortgage rates are bumping along at near-historic lows, and home prices range from bargain levels to outright steals. Uncle Sam has been tossing money at almost anyone who buys a house before the end of April.

So why is the mortgage market so frustrating for so many would-be borrowers? Because nearly three years into the credit crisis, and despite Herculean government efforts to get the housing market rolling, it can still be maddeningly difficult to land a loan -- even for folks normally thought of as low-risk, slam-dunk borrowers. "Well-qualified borrowers are unable to get a loan because lenders are really nitpicking -- I mean really nitpicking -- everything," says Kevin Iverson, a mortgage broker who owns Reed Mortgage, in Denver.

A January survey of senior loan officers by the Federal Reserve Board showed that 13.2% of respondents had toughened mortgage-loan terms in the previous quarter. Of course, lenders have a right -- and an obligation -- to be pickier. After all, loose lending standards contributed mightily to the housing market's collapse. And high-end, supposedly low-risk borrowers are struggling as much as anyone. American CoreLogic, a research firm, reports that nearly 13% of home-owners with jumbo prime mortgages -- loans of more than $417,000 taken out by creditworthy borrowers -- were 90 days or more behind on payments as of November. That's double the percentage in November '08.

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But brokers say the pendulum has swung out of the range of common sense. Steve Sugarman, a retired publisher and a real estate investor in Agoura Hills, Cal., is trying to refinance a $400,000 loan on an oceanfront Malibu townhome worth $1.2 million. Sugarman's financial planner, Dennis DeYoung, says his client's income is solid, his credit pristine and his assets substantial. Yet Sugarman, who estimates he has taken out or refinanced at least ten loans since the mid 1970s, has spent nearly four months trying to close on the Malibu place. He's on his second lender and must meet 23 remaining conditions before the loan can go through. "I don't see how the housing market can move forward when someone like me is held up," says Sugarman. The self-employed and those with complicated finances or variable income face particularly close scrutiny. They may be asked for down payments of 40% or 50%, says Iverson.

It's not just stingier lending standards hanging up borrowers. The mortgage market is laboring under recent controversial changes in appraisal guidelines as well as new fee-disclosure rules, which some borrowers find confusing.

The mortgage market will soon face a new challenge. The Fed has been buying mortgage-backed securities since November 2008 to keep interest rates low and money flowing into the mortgage market. When the Fed exits that business in April, borrowers could see mortgage rates rise by a half point, says Keith Gumbinger, of mortgage-research firm HSH Associates.

But he also sees good news ahead. That 13.2% increase in lenders reporting tighter lending standards was the smallest quarterly increase since the third quarter of 2007 -- a sign that the home-loan pendulum may soon swing back to rational.