Risky markets put on blacklist

WASHINGTON - Just when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow - even for those with good credit.

Mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans, from luxury Miami condos to early 20th century kit homes in Metuchen, N.J.

The entire states of California, Florida, Arizona, Michigan, Ohio and Nevada - which have seen the highest foreclosure rates and the worst price declines - are blackballed on some mortgage insurers' lists.

In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans - those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.

Three mortgage insurers - AIG United Guaranty and Genworth Mortgage Insurance Corp., both based in North Carolina, and California-based PMI Group - say Colorado Springs is not on their latest list of declining or distressed markets, according to the company's Web sites.

However, Philadelphiabased Radian Group Inc., lists all of the Colorado Springs area, along with Teller County, as declining markets.

Don Brekke, an equipment operator from Colorado Springs, tried to buy a bankowned 1950s ranch home for $113,000. At first he couldn't get a loan because lenders required a 10 percent down payment, more than he could afford.

Ultimately, he was able to qualify for a 100 percent loan from Colorado's state financing authority, and he plans to close in the coming days.

"It was a bunch of headaches - going around and around to get this done," Brekke said.

Banks that have lost billions because of bad bets during the housing boom are now reverting to strict lending standards not seen in nearly 20 years, according to industry data and interviews with lenders.

For new homebuyers and those seeking to refinance, it can mean higher down payments and a higher bar for credit scores, among other requirements. The toughest restrictions are in markets where home prices are falling, though regions where property values are rising are not immune.

"We're in the midst of an epic, broad, sweeping change in the mortgage industry," said Chris Sipe, a loan officer with America East Mortgage in Frederick, Md.

The reluctance to extend credit comes despite a flurry of government initiatives, including steady interest rate cuts by the Federal Reserve, intended to make it easier for would-be borrowers and those facing interest-rate resets on their mortgages.

Lenders' growing leeriness threatens to dampen sellers' already soggy prospects for the spring homebuying season - and that means more pain for the already battered housing sector and the broader economy.

The stinginess of banks is showing up in home loan statistics: The value of all new mortgages plummeted to $450 billion in the fourth quarter of 2007, down 38 percent from a year earlier, according to trade publication Inside Mortgage Finance.

Subprime loans, made to borrowers with poor credit, virtually disappeared from the market, plummeting 90 percent to $13.5 billion in the October-December quarter.

RESTRICTIONS FOR RISKY MARKETS

Here are some of the restrictions major mortgage insurers are applying to properties in markets identified as declining or distressed:

• A borrower can't receive more than 95 percent in financing; in some cases, the highest amount allowed is 90 percent.

• Loans for investment properties, second homes and manufactured homes are ineligible.

• Interest-only, option-payment and two- or threeyear adjustable-rate mortgages are ineligible.

• Refinances that allow the borrower to extract all of a home's equity are ineligible.

• Loans greater than $650,000 are ineligible

THE ASSOCIATED PRESS