Home loan lenders, the financial services superstars that helped fuel the nation's housing boom with adjustable-rate financing, no down payments and loans that didn't require a verified income, are stumbling through a hostile new world.
As more of their loans go into default, Wall Street is punishing their stock prices. Federal and state lawmakers are threatening tougher rules to rein in their loosened lending standards. Mortgage companies across the nation and close to home, which shut down suddenly two weeks ago -- are imploding under the weight of risky loans and rising defaults. One of the biggest of them all, Irvine-based New Century Financial Corp., which specialized in risky, or sub prime, loans to borrowers with bad credit history, is in tatters.
On the street even more people who received easy money from mortgage firms are themselves reeling. They're missing payments, being served with notices of default and losing their piece of the American dream.
Today good, functioning communities are suffering because of foreclosures. Following a recent committee hearing rife with horror stories -- about lenders inflating borrowers' incomes, not explaining what they were getting into and committing outright fraud. It's a profound and sudden shift in fortunes for a home loan sector that many now believe flew too high during the boom.
As the recent housing euphoria has morphed into an era of rising foreclosures and overdue mortgage payments, government officials and others are wondering how much responsibility lenders bear for a sudden and worrisome new economic landscape. It's a question with serious reverberations for the future. Borrowers may find it tougher to qualify or refinance, and mortgage firms say that could adversely affect the real estate market. Developers and even sellers of existing homes worry that a reduced number of buyers could significantly curb sales and values. That has real consequences for an economy that has thrived as the housing market boomed.
There is plenty of blame to go around. As home prices soared in recent years, the mortgage industry produced a dazzling array of innovative and riskier ways for borrowers to surmount the affordability problem, in many states across the country. And a new generation of borrowers seemed ever willing to suspend common sense and overlook the fine print -- adjusting interest rates, prepayment penalties, the consequences of minimum payments -- to buy the house of their dreams, no matter how far beyond their means. People know if they agree to these things they'll get the house tomorrow, and that's their only concern.
Now many of those borrowers are getting walloped, and the lending industry is receiving a large share of blame for stoking the fires beyond all reason. On both sides of the lender-borrower divide, people who should have known better didn't say "no." What now? Experts say in coming months there will be more legislative moves to rein in the most aggressive lending practices. That will likely spur orchestrated resistance by sectors of the mortgage industry.
Already 26 states have done so. --Whether Congress will enact a "suitability standard" requiring lenders to be certain a borrower can afford the loan. On the backside of a sensational five-year housing boom, changes are clearly in store. Earlier this month, mortgage giant Freddie Mac said it will no longer buy the riskiest loans that lenders offer unless the borrower can afford its highest-possible interest rate. Many qualify for such loans based on the ability to afford "teaser rates" as low as 2 percent. Mortgage lenders now are beginning to tighten their own lending rules.
Now, borrowers who might have qualified for 100 percent financing are being asked to put money up front and show more detailed proof of their incomes. At a recent state Senate hearing on mortgage industry practices, lenders also blamed "bad actors" in their ranks and argued against systemic overhaul. Indeed, industry leaders claimed so-called "nontraditional" loan products -- offering low initial rate that later reset to higher payments, for example -- have helped millions buy homes they couldn't otherwise afford.
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