Like a spreading infection, restrictions on credit are moving into new and more specialized niches of the mortgage market.
The latest to feel the pinch:
Loans with anything less than full documentation of borrower income, credit and assets.
Mortgages for certain second-home purchases.
Investment-loan applications where the buyer already owns at least three other rental properties.
Mortgages to borrowers with "nontraditional" credit.
Short-term construction loans that convert to permanent mortgages.
Adjustable-rate mortgages where the first rate adjustment occurs within 60 months after closing.
In a lender bulletin issued April 22 and scheduled to take effect for all loans delivered after Aug. 8, Freddie Mac said it plans to restrict financing to second home and investment real estate purchasers who already have "individual or joint ownership" interests in multiple properties. In the case of second-home buyers, they will be ineligible for new mortgages through Freddie if they have ownership interests in more than a total of four properties securing debt, including the one they propose to finance.
Similarly, loans for rental houses, rental condos and other investment properties will be ineligible if the borrower has ownership stakes in a total of four units. Previously Freddie allowed investors to own up to 10 rental properties carrying mortgages.
Freddie Mac also announced new cutbacks on refinancings of mortgages where the property had secured a "cash-out" refinancing within the prior six months. The company defines a cash-out as any refinancing where the replacement loan balance exceeds the previous balance by 5 percent or more. Recently, according to the company's quarterly surveys, more than 80 percent of refinancings involved equity-depleting cash-outs.
The rule changes, Freddie Mac said, are designed to "reflect the risk of these transactions" in the wake of post-boom property devaluations and higher rates of delinquency and foreclosure.
Meanwhile, private mortgage insurers -- who provide loss coverage for lenders and investors on loans where down payments are less than 20 percent -- have begun rollbacks on a variety of products, especially in areas they define as distressed or declining.
Genworth Financial, one of the largest insurers, recently told lenders that after May 5, it no longer will consider applications for second-home purchases anywhere in the state of Florida. The new policy is irrespective of borrowers' credit scores, assets or other characteristics.
Also effective that date, in all "declining/distressed" markets, Genworth will not touch cash-out refinancings, investment properties of any type, nontraditional credit applications, construction/permanent loans or adjustable-rate mortgages with initial adjustments within the first five years.
In its advisory, Genworth said the new restrictions are intended to promote "prudent underwriting standards" in light of higher risks prevailing "nationally and at localized levels."
PMI Group, another high-volume insurer, banned cash-out refinancings, limited documentation loans and all mortgages secured by investment properties in "distressed" markets. In non-distressed areas, cash-out refinancings on second homes and rental houses no longer are eligible for coverage, nor are interest-only loans on investment real estate and all mortgages on properties containing three to four units.
PMI also boosted minimum credit score requirements for "jumbo" loans nationwide to a 700 FICO, and now will require at least 10 percent down payments. The company also ruled out "stated income/stated asset" mortgages on duplex purchases, where one unit is occupied by the owner and the other is rented.
MGIC, the largest private mortgage insurer, recently eliminated coverage of all "option ARM" loans that have either scheduled or potential negative amortization features that increase borrowers' principal debt rather than reduce it monthly. During the boom years, option ARMs were wildly popular in major metropolitan markets across the country. MGIC's new ban is nationwide.
Why the continuing rollbacks and how long could they continue? Lenders and insurers are carefully studying the sources of their greatest losses from mortgage vintages between 2003 and 2007. Where they see inordinate risk, they are reacting much as they would to a disease: They are eradicating it.
In the meantime, consumers have little choice: Get used to it. The excesses of the boom begat the credit squeeze, and it's not going away anytime soon.