Is it harder for businesses, developers and homebuyers to get a loan in the wake of the subprime mortgage meltdown?
The answer is mixed depending on who you ask. Bankers say they’ve
gotten tougher on the riskiest subprime loans but money still is flowing to more stable borrowers.
Others agree lenders have clamped down on subprime loans but say other loans also are seeing subtle effects, such as bigger down payments or higher rates on loans where the lender is putting up most of the money.
Earlier this month, Arizona-based homebuilder Meritage Homes Corp. pointed to credit tightening by lenders as the reason some homebuyers backed out of purchases.
The cancellations were a key part of why Meritage lowered its 2007
outlook, news that hit the stocks of several homebuilders, including Irvine’s Standard Pacific Corp.
Banks are being more careful by taking more time with loans, according to Guy Cecala, publisher of Inside Mortgage Finance, a Bethesda, Md.-based trade publication.
Some lenders are requiring two appraisals where they used to require one, he said, based on a survey of 3,000 brokers done by the publication.
“Underwriting has gotten tighter, especially for subprime, but for prime as well,” he said.
One key area where banks have gotten tighter is in requiring more money from borrowers as a down payment, Cecala said.
“Even if you’re a prime borrower, the banks are demanding more money be put down,” he said.
Last week, Federal Reserve governor Randall Kroszner told lawmakers the central bank is weighing whether to ban some of the looser mortgage lending practices that fueled the boom of recent years.
Already, economists point to a “more conservative underwriting culture” that has seen banks cut the number of subprime loans they make. But traditional, safer prime loans are up, they say.
Locally, bankers, brokers and others say lending continues to be strong in Orange County for homes, commercial real estate and businesses. In some cases, borrowing may be more expensive, they say.
“Growth has not changed in deposits or lending,” said Ed Carpenter, chief executive of Carpenter & Co. in Irvine, a banking consultant.
Nor is it taking longer to get a loan, according to Carpenter.
Major lenders say they have adjusted lending policies for subprime loans.
Loans to borrowers with imperfect credit have been plagued by late payments, foreclosures, and, in the worse cases, fraud by people taking advantage of lax lending policies of the past few years.
The sector’s meltdown was highlighted by the spectacular fall of Irvine’s New Century Financial Corp., the largest subprime lender in 2006 that filed for bankruptcy in April.
The subprime collapse hasn’t spread to other lending, according to banks and observers.
Wells Fargo & Co., the No. 2 bank operating in OC after Bank of America Corp., said it has changed its credit policies for subprime loans, which are about 8% of its lending, according to regional sales manager Mitch Redden.
Washington Mutual Inc., the largest savings and loan operating in OC, changed its subprime standards to not allow loans with 100% financing, spokesman Tim McGarry said.
At Bank of America, which doesn’t do subprime loans, the company’s foreclosure rate actually dropped in the past two years.
“We made a decision back in 2001 not to get into subprime,” spokesman Terry Francisco said.
“There’s plenty of money available,” said economist Jay Brinkmann of the Mortgage Bankers Association in Washington, D.C.
Lenders have set tougher standards for verifying a borrower’s income, according to Brinkmann. They’ve also ditched 100% loans and are requiring higher credit scores, he said.
“But only the subprime market has been affected by tightening credit,” he said.
Some, including Scott Simon of Newport Beach bond fund manager Pacific Investment Management Co., see more subprime problems to come.
Adjustable rate loans that will reset at higher rates in the next two years could put more pressure on lenders, he said.
Even so, now “subprime is tightening, not prime,” Simon said.
For lending to businesses and commercial real estate, Brinkmann said he sees rates creeping up on deals but overall little change.
There has been some talk of lenders increasing the spread between what they pay to get money and what they charge to lend it to businesses and real estate deals.
But higher rates could be affecting just the riskiest deals where buyers are using little of their own money, according to sources.
Wider spreads could cause a slowdown in buying of office buildings and other real estate, as higher rents would be required to make deals profitable.
A larger tightening of credit might not be far off, according to private equity investor Murray Rudin, a partner in the Irvine office of Los Angeles-based Riordan, Lewis & Haden Inc.
“The last 40 years show every expansion of credit oversteps itself and there’s a contraction,” he said.
Next week, all eyes will be on the Federal Reserve, which meets to consider short-term rates, now at 5.25%.
