Crunch turns back clock on mortgage lending

By Lisa Baertlein

LOS ANGELES (Reuters) - As U.S. banks mop up the mess from billions of dollars of bad home loans, buyers are finding the days of cheap money are over and, in many cases, tougher versions of old lending rules now apply.

People of modest means have seen the American dream of home ownership move further out of reach. Even affluent buyers, who took advantage the last decade's low interest rates and looser lending standards to move up to more expensive homes or to buy investment properties, are seeing their options evaporate.

Gone are the days when almost anyone could get a loan with a down payment of less than the traditional 20 percent.

"The clock is rolled back about 20 years," said Lou Barnes, co-owner of Colorado-based Boulder West Financial Services and publisher of Mortgage Credit News.

Such obstacles to obtaining a mortgage are among the factors keeping the depressed U.S. housing market from recovering, which in turn is having a dampening effect on the broader economy.

"You definitely need more money to buy a house than you did a few years ago," said Guy Cecala, publisher of Inside Mortgage Finance. "The days of putting no money down are gone."

Over the last decade, low interest rates, of between 5 and 6 percent, spurred a frenzy of competition and led to "exotic" loan products that made it possible for almost anyone to buy a house.

These days, lenders are balking at anything other than "plain vanilla" loans to would-be buyers with stellar credit histories, significant down payments and income that can be verified with government tax forms.

SKITTISH AFTER SUBPRIME COLLAPSE

Data from the last few years shows a rise in so-called "conventional/conforming" loans under the former Fannie Mae and Freddie Mac insured limit of $417,000.

According to Inside Mortgage Finance, such loans accounted for 35 percent of the total mortgage market in 2005 and were 48 percent of the market last year. During the same period, subprime loans -- loans to poorly qualified borrowers -- fell from 20 percent of the market to 7.8 percent.

Mortgage brokers say that those buyers who still qualify now face higher fees and interest expenses.

For example, interest rates on jumbo mortgages -- or loans above $417,000 -- remain higher than for other loans, despite a relatively low rate of default.

"The market is so skittish right now. (Lenders have) been so burned by their inability to understand the risk of subprime loans that they're translating that to the rest of the market," Cecala said.

Manny Torres, 38, is among the borrowers feeling the pain inflicted by new income and asset verification rules.