Higher hurdles to home loans slow real estate sales in Puget Sound region

For Ben and Shelby Dobbs, buying their Bellevue home has been akin to being struck by lightning. Twice.

First, their purchase nearly unraveled last August when the crisis in the mortgage industry suddenly and severely tightened the availability of home loans. That forced the couple into a high-interest-rate loan.

Now, in refinancing from 7.375 percent down to 6.25, they — like so many others either buying or refinancing — have found the mortgage-industry turmoil isn't over.

A loan process that used to take a week or two has taken them eight, despite having good jobs and good credit.

In fits and starts, their lender has required them to submit and resubmit pay stubs, update retirement-account data and provide more recent photos of their new kitchen remodel.

Even old employment information is fair game. In one surreal moment, their lender contacted Ben Dobbs to verify his wife's 2005 job. A Microsoft project manager now, she was self-employed back then.

"They asked if I thought she did a good job," he recalled. "I said I thought she did a fantabulous job."

Describing the entire experience as "the biggest pain," Dobbs says he's beginning to understand why the mortgage industry is struggling.

"The banks are driving themselves bankrupt by making it hard for qualified buyers to buy homes easily," he fumed.

Mortgage experts stress there's plenty of money to lend at rates near historical lows. What's changed, they say, are the rules for lending it.

Responding to the demands of the big mortgage-money sources, the requirements placed on borrowers have become much tighter.

As a result, as much as a third of the local pool of potential buyers are ineligible for mortgages, estimates Keely Jared, owner of Re/Max Metro Associates in North Seattle.

"That, to me, is the No. 1 reason why our properties are taking longer to sell and why sellers are having to make more concessions in the way of price drops and seller financing," Jared said.

In the past few years leading up to last summer's meltdown, "it wasn't a question of whether you could get a loan; it was, 'What was the price?' " said Dave Erickson, president of the Washington Association of Mortgage Brokers and owner of Mortgage Broker Associates in Lynnwood.

Ken Larsen, senior vice president at Banner Bank, likens those days to "a really big party."

"And the bigger the party, the bigger the mess," Larsen said. "Right now there's a lot of cleanup."

Lenders are being cautious as more bad news continues to roll out.

From January through March, more than 7 percent of U.S. homeowners were behind on their mortgage payments or in foreclosure, the Mortgage Bankers Association reported Thursday. That's the highest level of distress since 1979.

As the mortgage industry sorts itself out, everyone buying or refinancing is being affected.

Erickson breaks down the biggest changes:

• Almost all 100 percent financing is gone. Buyers now must have 3 to 5 percent down payments.

• No-document loans are history. Requiring no proof of income or employment, these loans were helpful to borrowers with inconsistent incomes, as well as those in relatively new jobs.

"There were people in bona fide situations where these loans filled a void," Erickson said. "Now, the market doesn't respect that."

• Piggyback mortgages — for example, one for 80 percent of the property's value and another for 15 or 20 percent — are gone. Borrowers used that strategy to avoid having a more costly single jumbo loan for an expensive property or to avoid private mortgage insurance on loans with less than 20 percent down.

Some of the demand for piggyback mortgages was erased in March, when the jumbo loan limit was raised from $417,000 to $567,500 for King, Pierce and Snohomish counties.

However, jumbo loans are more expensive than conventional, fixed-rate mortgages. That translates to higher house payments, squeezing some buyers out of the market.

• Adjustable-rate mortgages are still out there, "but their program restrictions are pretty severe," Erickson said.

• Perhaps the biggest change has been in FICO score requirements. FICO measures a borrower's credit worthiness based on types of credit used, payment history, amounts owed and other factors.

With 850 being the highest possible score, borrowers used to be able to squeak into an adjustable-rate subprime loan with a score as low as 580. Subprimes are all but dead, and Erickson says the new threshold for any loan is about 620.

According to Fair Issac Corp., FICO's developer, borrowers need to score 700 or above to get the best interest rate.

But even buyers who can qualify for loans are getting discouraged, Jared says.

Two buyers she's been working with "have given up."

"They get [loan] rates and terms, then when they find a property, the rates and terms have changed," she said. "I have a feeling I won't hear from some of these buyers for a couple of years because it's so debilitating."

Her advice for those who want to stick it out: Shop three to five lenders because terms and rates can vary widely. Get preapproved for a loan.

When buyers find a property, lock in an interest rate immediately, she suggests.

As Ben Dobbs waits for his refinance to close today, he is trying to take his own advice: lighten up and don't take the situation too seriously.

"The whole nation is going through trying times," said the expectant father, whose wife is due within weeks.

"I'm thankful for a lot of things, looking around right now."

Elizabeth Rhodes: erhodes@seattletimes.com