NEW YORK When Ginny Shipe decided to buy a new home earlier this year, she was calmly confident her experience as an industry insider, her stellar credit rating and debt-free status would make it a snap.
She could not have been more wrong. The process was as arduous as it was protracted. Eventually, Shipe had to move out of her old home and couch surf with friends while she waited, and waited, for approval.
"What I had thought would be a fairly straightforward loan application turned into the Inquisition," she said in her office in downtown Chicago.
Two years after the depths of the financial crisis, the pendulum is still swinging away from the days of supereasy credit, when bankers required almost no proof that a customer would be able to repay a loan. Before the housing market crashed, even industry insiders ridiculed certain popular mortgages as "NINJas" -- "no income, no job loans."
Banks are a lot pickier today. To protect themselves from defaults, they have sharply increased underwriting requirements -- and paperwork -- needed to get a loan. They've adopted less agreeable views on credit cards and other forms of revolving debt, investor properties and income history.
The crackdown comes as major banks find themselves mired in controversy at the other end of the credit spectrum. What is described by some as a technical error -- signing thousands of affidavits for foreclosures without proper review -- has turned into a political scuffle ahead of next month's U.S. elections. Facing pressure from U.S. lawmakers, Bank of America said on Friday it would halt foreclosures in all states, fueling concern that zombie outstanding loans will further hinder housing's rebound from its worst crisis since the 1930s.
Yet, as Shipe's case suggests, the market for new loans is not much more encouraging. And while foreclosures are capturing most of the headlines, barriers to credit affect far more Americans and could be a bigger drag on any recovery.
Shipe never gave a moment's thought to the possibility that she would struggle to secure a mortgage.
After all, she has a credit score above 800, far higher than most Americans. And as the chief executive of the Council of Real Estate Brokerage Managers, an industry group that is affiliated with the National Association of Realtors, she happens to be an insider.
Shipe is also debt-free. In her last home she not only paid her mortgage on time, but also put an extra $1,000 per month toward the principal. To top it off, she has banked with JPMorgan Chase -- whom she approached for a mortgage -- for more than a quarter of a century.
But when Shipe applied for a jumbo loan -- over $417,000 -- toward a $630,000 town house in Chicago's affluent Lakeview neighborhood, she was told she needed 20 percent down instead of the 10 percent she was expecting. So she reluctantly used cash savings and withdrew money from her money market account.
Then came the documentation -- an onerous process that has recently become almost unbearable for solid borrowers trying to take advantage of a sluggish market and eye-poppingly low mortgage rates.
For a month, Shipe's bank proceeded to demand tax returns going back a couple of years, plus financial statements. The latter were then scrutinized closely and she was asked personal questions about old transactions.
"I could have joined the FBI in a shorter period of time and with less documentation than it took to get that mortgage," she quipped. "After what I had to go through to get that house, by the time my loan was approved I almost didn't want it anymore."
A JPMorgan spokesman wouldn't comment on Shipe's application, but said the bank follows a disciplined process to verify information.
FREDDIE AND FANNIE
The push on documentation has been exacerbated by the growing struggle between the nation's largest lenders and Fannie Mae and Freddie Mac, the U.S. institutions that help provide some three-quarters of funding for residential loans.
Known as government-sponsored enterprises, or GSEs, Fannie Mae and Freddie Mac have required taxpayer bailouts of $150 billion since late 2008, and have warned they will likely need more help from the U.S. Treasury.
Today, the two companies are scrambling to recoup some of the losses that continue to pile up on the $5 trillion in loans they helped fund. To that end, they are scrutinizing loan data for minutiae that would disqualify them under their standards. Banks are then being asked to buy back billions of dollars in loans Freddie and Fannie deem as problematic, forcing the lenders to increase reserves and legal teams to contest claims.
All told, the U.S. banking industry stands to lose up to $44 billion as they "repurchase" such loans. More than half of that total is expected to be absorbed by five big banks: Bank of America Corp, JPMorgan, Citigroup, Wells Fargo and SunTrust, according to Paul Miller, an analyst at FBR Capital Markets.
Brokers and borrowers are caught in the crossfire. During the housing boom, a borrower could turn to private investors. But today Fannie Mae and Freddie Mac -- along with the Federal Housing Administration and Ginnie Mae -- have a hammerlock on market share.
"Nobody ever expected this tsunami of liability coming back," said an executive who helps oversee secondary markets at a top five U.S. lender, who spoke on condition of anonymity.
"While we all have gigantic units fighting repurchases, there's a feedback process that is scaring the hell out of processors and underwriters," he said. "Everything has to be absolutely perfect and checked a bunch of times over in terms of documentation before they will move it forward."
No one needs to tell that to Amy Tierce. A mortgage specialist at Fairway Independent Mortgage in Needham, Massachusetts, Tierce said she was stunned earlier this month when CitiMortgage rejected a loan that she closed for a pair of well-heeled borrowers in August. The reason: the top right-hand corner of one of the paystubs appeared torn in a photocopy.
"I got another paystub and Citi bought the loan, but that's just silly season in the mortgage business," Tierce said, irked because the borrowers' status seemed golden. Their debt was 14 percent of their income and they were borrowing just 25 percent of the home's value.
"We're at a point now where everybody is in one category, she said. "The industry is going to look at you like you are a lying, fraudulent cheat. That's how they approach every loan."
CitiMortgage, echoing other banks, says its application and underwriting practices are based on "responsible finance principles." Its processes are in the best interest of its customers, investors, and its own business, a spokesman said.
"It's a tough balancing act," said Donald Bisenius, an executive vice president of Freddie Mac's single-family home loan guarantee business. "What you don't want to do is plant the seeds for another downturn. Those that might advocate relaxing those standards I think would be just kicking the can down the road."
If anything, Fannie Mae and Freddie Mac -- now fully in the government's control -- have been getting more aggressive with documentation and underwriting requirements. In August, Freddie Mac said lenders must submit their plans for responding to its $5.6 billion in repurchase requests. It mentioned "financial consequences" for non-compliance.
"The experience (banks) are having with repurchases, in some ways, is having the intended consequence," Bisenius said. "In the underwriting model that we have, the way you keep people honest is if you make a misrepresentation, there's a consequence. It's called a repurchase."
In December, Fannie Mae's automated underwriting model limited the maximum allowable debt-to-income ratio -- the percentage of a consumers debt payments relative to income -- to 45 percent, with some flexibility to 50 percent. Before, lenders commonly qualified borrowers with debt ratios of 55 percent or higher, according to a Fairway product specialist.
Last month, Fannie Mae said it will require lenders to include all revolving debt when considering a borrower's finances. A lender could exclude those debts if there were 10 or fewer payments remaining under old rules.
Fannie Mae also expanded the requirement that gifts that provide downpayment assistance or temporarily help a borrower's financial condition be documented to all loans, not just when the mortgage is 95 percent or more of a home's value.
"Before, they may have not been as concerned with a 70 percent mortgage with a gift letter," said Brad Blackwell, an executive vice president and national sales manager for Wells Fargo. "They may have said, 'we don't lose on this one.'"
VALUATION A MOVING TARGET
It's not just income that is questioned. With foreclosures rising, home values have been slippery targets.
So Fannie Mae and Freddie Mac have been applying their own home valuation model to loan applications as a check to the lender's assessment, some loan officers said. If a lender's appraisal is higher than the model's, questions begin to fly, they said.
Freddie Mac in February began offering value estimates from its "Home Value Explorer" system free of charge, expecting loan officers would use the information to flag appraisals that may need a second look, a spokesman said. It is engaging lenders more frequently to discuss valuation controls, too, he said.
In California, Fred Arnold, a branch manager for American Family Funding, estimated that 40 percent of his appraisals are being re-reviewed because home valuation models are coming out with slightly lower estimates.
"They are running it up against the computer and shoving it down the throats of the banks saying 'Why did you value this so high?'" Arnold said.
Fannie Mae hasn't changed how it uses its risk assessment models, a spokeswoman said.
Banks have been slow to drop rates to consumers relative to the decline in other rates, including what is required to sell loans to Fannie Mae or Freddie Mac. The spread between the primary rate that consumers pay banks and secondary mortgage rates (where lenders sell loans to investors) is at its widest in two decades, if you exclude a spike during the height of the financial crisis, according to Bank of America Merrill Lynch research.
A big reason is reduced capacity in the mortgage industry following mergers and layoffs. As a result, the top three lenders -- Bank of America, Wells Fargo and JPMorgan -- made more than half all loans in the first half of 2010.
Total employment in the mortgage banking industry, including brokers, is down by half since 2006, to levels not seen since 1997, according to Amherst Securities. Employment for just those that provide mortgage credit has hovered below 200,000 since 2008, down from a peak of about 350,000 in 2006.
Meanwhile, issuance of mortgage-backed securities -- a measure of lender activity -- has been running at 2.5 times 1997 levels, Amherst analysts said.
Banks are requiring higher margins on loans to help pay for the additional cost of making sure a loan meets investor and regulatory requirements, said Bill Dallas, chairman of Skyline Financial, a mortgage banking firm in Calabasas, California.
"And no one is adding staff because they know this will end and they are trying to get loans done with 3 people where they need 23," he said.
"It's almost like DEFCON 1," he added, referring to a U.S. military measure for alarm. "We are on heightened state of alert in the mortgage industry and it will end when there is no volume" and banks will have to be more competitive, he said.
Standard 30-year fixed mortgage rates last week hit their lowest levels on Freddie Mac's records, hovering at 4.27 percent for a decline of more than half a percentage point since May. With that drop, some 90 percent of fixed-rate 30-year loans have at least a 0.4 percentage point saving if they overcome other hurdles, said Scott Buchta, head of investment strategy at Braver Stern Securities in Chicago.
The refinancing index of the Mortgage Bankers Association -- a measure of applications to refinance --- surged in August to 5,085.3, double levels seen in May and the highest since May 2009, but has since trailed off.
Tougher refinancings may further hobble the housing market's ability to lead the economic recovery as it has in past cycles. Residential investment and housing services -- including home construction and remodeling -- comprised about 15 percent of gross domestic product in the second quarter and in 2009, down from almost 19 percent in 2005, according to the National Association of Home Builders.
A year-and-a-half since the government began its Making Home Affordable (MHA) program to refinance or modify loans, housing remains in a "quite fragile" state, as home sales sit at their lowest since the National Association of Realtors began collecting the data, said Amherst analysts. Without revisions to government policy, one in every five borrowers is in danger of losing their home, the analysts estimated, looking at troubled borrowers or underwater mortgages.
But four in five are not impaired, leaving the majority of homeowners able to at least consider a refinance.
Wells Fargo Home Mortgage, the nation's largest lender, is hiring fulfillment staff "as fast as we can" to deal with rising applications, said Blackwell, the national sales manager. The bank has also extended rate-lock periods to 90 days from 60 days, at no cost to the consumer, he said.
Blackwell bristled at suggestions that banks were part of the problem. "The perception today is 'Oh my gosh, I've heard so much about how hard it is to get credit, I'm not even going to try.' But there are millions of people refinancing today. I don't want to discourage people from calling their lender to find out if they qualify," he said.
A Bank of America spokesman declined to comment on how its practices on documentation might have changed.
TELL US MORE
In the meantime, even the most qualified borrowers can struggle to secure a loan.
Like Ginny Shipe, Mark Berg was put through the wringer. A Wheaton, Illinois, financial planner, Berg recently applied to refinance for a second time in 12 months, this time seeking to cut his mortgage term with a 3.75 percent 10-year loan, from the 4.75 percent 30-year mortgage he got with "no hiccups."
Describing himself as being on the "extreme side of detail-oriented," he provided all the necessary documents to CitiMortgage, his new lender, and expected no problems. Like Shipe in Chicago, he boasts a credit score above 800, some 100 points above the level that credit bureau Experian says usually suggests good credit management.
It wasn't enough. Citi called him again, and twice more after that, for more information, including re-signing a signed copy of his 2009 tax return.
"The bank goes and asks for the silliest things for triple checking," he said. "The pendulum is swinging way to the other end." (Additional reporting by Nick Carey in Chicago; Editing by Jim Impoco and Claudia Parsons)