Risky loans harder to find but still available

By: ZACH FOX - Staff Writer
Some lenders still offering no-money-down mortgages | Tuesday, January 1, 2008 8:47 PM PST ∞

As a housing recession widens the credit crunch, riskier loans aimed to help first-time homeowners remain available but are becoming harder to secure and could disappear over the next year.

And, if home prices continue to decline as expected, the no-money-down mortgages are likely to put homeowners in situations where they owe more than they own.

Diane Goodwin of Oceanside is one property owner who has seen the value of her investments drop to that point -- and she used 20 percent to 30 percent down payments. With mortgage payments set to jump in six months, she says she cannot refinance and is asking her lender to freeze her current payments until the market recovers so she can avoid foreclosure.

"It'd be 10 times worse 10 times faster (if we did 100 percent loans). We'd already be in foreclosure with most of these homes if we didn't have the equity we do now," she said.

The no-money-down products are still available, but they are getting scarcer every day and could be eliminated over the next year, said Dave Hopkins, a mortgage broker with Encinitas-based Morfacts.

"The banks are really eating it on these mortgage notes," Hopkins said.

He said the problem is that investors are skittish about purchasing the loans from banks, especially a loan that starts with no equity and could have negative equity if the housing market were to continue its slide.

Aimed at first-time owners

But homeowners only need to refinance if they are having trouble making payments. The 100 percent mortgages with fixed-interest rates are great products for first-time home buyers who do not have the cash for a down payment, said Yamila Ayad, owner of Mission Home Loans, a San Marcos-based mortgage firm.

"These loans are meant to be for people who are buying the home for a long time. They are saying ... 'If I can live with this today, I will be able to continue making this payment. If the value goes down next year, it doesn't affect me because I'm not leaving,' " Ayad said.

Though the loans are available, actually securing one has proven difficult for Nick Gonzales, 28, who wants to buy his first home, searching mostly in Southwest Riverside County. He said he has above-average credit and solid, verifiable income. Three months into his home search, he has not qualified for any 100 percent loans.

In part, Gonzales, one of Ayad's customers, cannot find a loan because some lenders have designated San Diego as a declining real estate market and applied a 5 percent penalty to all loans for the area. That means a homeowner looking at a 100 percent loan for a $400,000 home would need to put $20,000 down to secure the loan, effectively eliminating all no-money-down programs.

"It's almost like people who were not responsible for the downfall of the market are being affected by it. We feel like we're innocent and being held guilty," he said.

Gonzales, who rents a home in Mira Mesa, said he is only looking at fixed interest rates. He and his fiancee hope to move into a new home before their March wedding and have cut expenses, including Christmas presents, in order to save up for the home.

"Our gifts are our wedding rings and a new home," he said.

Safe when used responsibly

The Center for Responsible Lending has not called for the elimination of no-money-down mortgages even though they are riskier than loans with significant down payments, said Paul Leonard, executive director of the center's California arm.

Other risky mortgages include ones with flexible interest rates or loans based on "stated income," rather than income verified with pay stubs.

"Each of these individual features, if they are administered carefully and responsibly in isolation, are fine. But when you combine stated income and 100 percent loan-to-value, you get a disaster," Leonard said.

Keep it cheap

Countrywide, the nation's largest home lender, has discontinued many of its 100 percent loan programs since the foreclosure crisis started, said Greg Sayegh, the company's executive vice president for distributed retail.

Many of the 100 percent loans are only available because they are backed by government agencies, such as the U.S. Department of Veterans Affairs. So-called VA loans and other government-backed products -- which have a maximum amount of $417,000 -- are the only no-money-down or low down payment mortgages now available through Countrywide.

Bank of America is offering no-money-down loans through a program called Neighborhood Champions. The loans are available to doctors, nurses, teachers, police officers and firefighters because the bank feels allowing those professions to live where they work provides a community service, said Terry Francisco, Bank of America spokesman.

But for more of the general public to have access to 100 percent loans, mortgage brokers are calling for the government to increase the "conforming limit" of $417,000. Loans worth less than the limit can be backed by the government and are more likely to be approved by banks skittish about lending.

In North County, it's difficult to qualify under the low limit on federally guaranteed loans because local home prices often exceed it. For example, November's median home price in North County was $589,000, according to a report by the North San Diego County Association of Realtors.

-- Staff writer Zach Fox can be reached at (951) 676-4315, Ext. 5412, or zfox@californian.com.

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