After the debacle, lenders and borrowers turn wary

It's been only a little more than two years since the residential real estate frenzy in the Las Vegas Valley hit its high water mark and started sliding in the other direction, but it seems like ages ago. Lenders and borrowers watched the market spiral downward and it led them to rediscover a long-lost virtue: caution.

The result of the upheaval in recent months has been that the process of getting a mortgage today is very different from what it was only a few years ago. Simply stated, it's harder to get a home loan now.

Across the board, lenders are much more cautious than they were three years ago, said Sophie Lapointe, president of the Nevada Association of Mortgage Professionals, which represents mortgage brokers in the Silver State.

"It's the pendulum effect," said Lapointe, a Henderson-based broker. "Now every (lender) is ultra-, ultra-conservative and requires full documentation. Everyone has to show their documents."

As Las Vegas and the rest of the country come to terms with the new realities of real estate, caution has become the watchword.

Home buyers are careful not to overextend themselves and shun the exotic loans that were so popular during the boom.

Lapointe said Federal Housing Administration-backed and conventional fixed-rate loans are now by far the preferred choices of borrowers. Lapointe said that her company, Five Star Mortgage, is finding that fewer than 5 percent of customers want an adjustable-rate loan.

At a seminar for first-time home buyers held April 30 at the Sahara West Library, broker Dawn Lane of the Professional Realty Group noted that many people in the Las Vegas area bought more house than they could afford during the boom.

"Just because your loan officer says you are qualified for a $250,000 mortgage doesn't mean you have to go out and buy a $250,000 house," she said.

Speaking at the same seminar, Ken LoBene, Las Vegas field office director for the U.S. Department of Housing and Urban Development, observed that the decline in home values has been especially tough on those who borrowed money on unfavorable terms. Too many borrowers were quick to accept loans with excessive fees or escalating interest rates because they were overly eager to close a deal during the boom, he said.

"I always tell people, next to deciding who you want to spend the rest of your life with, the single most important decision you'll make is who you borrow several hundred-thousand dollars from," LoBene said.

With mortgage lenders more cautious now than they've been in years, a borrower's credit score is assigned greater significance by loan officers. Those with higher credit scores have always been considered more creditworthy than those with mediocre scores and therefore deserving of lower loan rates, but lenders are now breaking down the applicant pool into more and more tiers of risk -- requiring higher interest payments from lower-scoring individuals.

Under guidelines set by the Federal National Mortgage Association, those with a top-flight credit score of 720 or above, as of May 12, were eligible for an interest rate of 5.75 percent. Those scoring 680 to 719 were eligible for a 6 percent loan. The next tier down in creditworthiness, persons scoring 660-679, got a 6.5 percent rate, while those scoring 620-639 were eligible to receive a loan at 7 percent.

During the boom, there wasn't such a sharp difference in home loan interest rates based on modest variations in credit scores, Lapointe said. The way lenders currently operate indicates that, first of all, they now recognize there are inherent risks in mortgage lending, and, secondly, they believe credit scores are the best predictor of which borrowers are more likely to default.

Lapointe said the lax lending policies that helped enable the real estate boom of 2003-2006 were partly a cultural phenomenon. The broker said she saw more and more young consumers unwilling to save up for a down payment and live within their means, opting instead for 100 percent financing to get into a big house.

"The children of the baby boomers are used to being given everything they wanted," Lapointe said.

Gone are the days when anyone with a mediocre credit score in the mid-600s could step up and secure an interest-only home loan with little or no money down, often showing no documentation whatsoever to support one's "stated income" claim. Now, for all borrowers, the mortgage process involves meticulous documentation of income and financial history. An applicant's credit score, always a factor weighed by lenders, has now become more critical than ever, industry insiders report.

The impetus for the big change, of course, was the vanishing of the perception that home prices in America -- and especially in booming Las Vegas -- could only go up, up, up.

The post-millennial bubble in residential real estate values was unlike anything the nation had ever seen. Instead of rising only slightly faster than the rate of inflation, which had been the norm over the preceding 150 years or so (Depression excluded), home prices soared from 2003 to 2006 -- roughly doubling in the Las Vegas Valley.

The air started coming out of the bubble in early 2006, and by mid-2007 the public and Wall Street were forced to acknowledge a serious problem existed. The first five months of 2008 were filled with cascading waves of gloom and doom, including billions of dollars in write-offs by Wall Street firms and massive home foreclosures -- especially in Las Vegas and other metropolitan areas that had experienced the steepest price gains and most frenzied speculation during the boom.

When the notion that home prices could only go in one direction (up) vanished in a puff of smoke, the jig was up. Real estate investors sprinted for the exits and families that had taken out adjustable rate mortgages on the expectation they could refinance on friendlier terms after the expiration of introductory teaser rates faced a cold shower of reality.

Downward pressure on home values made refinancing impossible for most homeowners, while a ratcheting up of monthly payments for holders of many adjustable rate mortgage loans doomed hundreds of thousands of families to foreclosure nationwide.

"It's like the old saying goes, 'As long as the tide is high, all boats float. When the water comes down, you can see who's been skinny-dipping,'" Lapointe said.