Why Even Rich People Are Having Trouble Getting a Mortgage

Why Even Rich People Are Having Trouble Getting a Mortgage

Home prices are rising, but even the well-off are facing obstacles from tight-fisted banks

By: Richard Satran

US News & World Report’s | August 1, 2013


Having trouble getting home financing? You’re not alone. Even wealthy  people are getting rejected under the tough new lending rules adopted  after 2008’s housing market crash.

Moneyed  enclaves are still feeling the impact of tight mortgage money. In the  breezy New Hampshire lakes region where “On Golden Pond” was filmed and  waterfront homes routinely sell in the $5 million to $10 million range,  sales are “brisk” but loan applications are often rejected, says sales  associate Jerry Love of Peabody & Smith Realty in Holderness, N.H.,  on the shore of Squam Lake.

“We don’t see deals  sail through with the automatic approvals that we used to see,” Love  says. “And we are seeing plenty of wealthy people turned down on  million-dollar loans who would easily have qualified a few years back.”

The  rules may get even tougher under proposals now being considered in  Washington designed to cap borrowing as a percentage of income. That  will be especially bad news for first-time homebuyers and people with  moderate incomes who have the hardest time lining up financing. But even  those with millions in assets and high credit scores are being turned  down if their income is low. And in a low-rate environment, their  investment income counts for less than ever on bank loan applications.

“People  with a lot of resources are usually OK getting first mortgages, but  they are finding they can’t refinance or get funding for a second home,”  says Tyler Vernon, a loan specialist for Biltmore Capital Advisors in  Princeton, N.J. “Of course it’s a nice, high-level problem to have. But  it’s a real problem for retirees in places like the Northeast.”

Also,  while increasingly stringent income requirements are posing the most  barriers, stingy assessments are also a frequent problem for costlier  deals, according to real estate agents and lenders. In part, that’s  because “assessors are protecting themselves because banks have been  suing them over mortgage failures that showed inflated values,” Vernon  says. Costly properties can pose difficulties when assessors try to find  comparable sales for estimating what mansions are worth, Love adds.

“Everything  has moved to a much more rigorous underwriting environment, and every  datapoint in every application is verified, checked and documentation is  gone over multiple times,” says Michael Fratantoni, vice president of  single-family research and policy development at the Mortgage Bankers  Association.

People with money are finding ways  to buy properties, but in the first go-around, they are finding  surprises. “The lenders want income statements. They want to check with  employers directly on people’s work record, and they want to see people  who have been in jobs for awhile,” Love says. “That’s not something our  wealthy buyers can always show.”

To be sure,  it’s first-time buyers and people with moderate incomes who are having  the most trouble getting credit, Fratantoni says. But this is a  dramatically different lending environment no matter what income strata  you are in. The MBA’s index on mortgage credit availability has risen  slightly over the past year, but it’s nothing like it was prior to the  crash. The MBA’s credit availability index is just two years old. But it  calculates that home financing would have been eight times as easy in  the years leading up to the housing collapse.

Still,  some lending has thawed a bit. The MBA says there has been some recent  easing up on loan requirements, and wealthier borrowers have benefited  the most: Even borrowers without high incomes are starting to qualify  based on healthy savings and high credit scores alone. “They have a  better chance, but not every lender is willing to do that,” Fratantoni  says. “It might require some shopping around.”

But  even as the housing market improves, loan originations overall are  expected to drop by 10 percent this year versus last, according to the  MBA. Banks remain reluctant to part with their own reserves, even though  they are flush after five years of easy money from the Federal Reserve.  Fratantoni says the change in credit availability reflects the banks’  more prudent lending and the elimination of “no-documention” and  “interest-only” loans that led to many of the foreclosures in the real  estate crash.

Also, bad loans of all shapes and  sizes are still working their way through foreclosures and court  proceedings. Just this week, prosecutors in New Jersey filed charges  against one of television’s “Real Housewives of New Jersey,” Teresa  Giudice, and her husband Giuseppe “Joe” Giudice, who were charged with  falsifying income data on $2 million in home mortgages dating back to  the early 2000s when standards were loose.

Financial  regulators are also pushing for controls to avoid the excesses that led  to the crash. The new Consumer Financial Protection Bureau has been  pushing for a limit on borrowing when a debt-to-income ratio exceeds 43  percent, although Congressional opponents worry it will “reduce access  to credit that qualified borrowers need to buy homes,” according to a  press release issued by members of a House Financial Services  subcommittee.

Lending experts say consumers  need to be well-prepared to deal with the stringent process when they  seek loans. Documentation is important, sometimes in the form of a  letter from an employer. People seeking mortgages should also be  prepared to shop for deals. Different lenders have much different  standards. Down payments are rising for many loans, with 20 percent to  30 percent equity required from private lenders. For those who qualify  for FHA loans, the down payment is 3.5 percent, but requirements for the  federal lending program are stringent. Two years in a job and a credit  score of 620 or better are needed, and costly mortgage insurance adds  more than a percentage point to the lifetime cost of the loan. For  wealthy buyers, FHA loans don’t help much since they are capped at  $625,000.

The high-end lending market is  slowly recovering, though, and private lenders are extending credit for  the well-heeled while avoiding the starter-home set that can borrow  through government programs. “It’s more work but things are getting  done,” says Love, whose clients are mostly those with enough money to  afford a second home. “We are very busy this summer, and we haven’t even  gotten to the peak period [at summer’s end when people often buy  vacation homes.]”

Biltmore’s  Vernon says his firm has been busy getting loans for wealthy clients  who borrow against their investment portfolios. The rate of borrowing in  so-called margin accounts has reached near the all-time highs just  before the 2008 market crash. That strategy is attractive because such  arrangements offer rates as low as 1 percent and sometimes even less,  and they require no additional down payment because the banks hold the  securities that back up the loans. “It’s almost no risk to the banks  because the securities are pledged as collateral,” Vernon says.

The  downside is that if the securities fall in value, the borrower’s assets  can be liquidated. Vernon says he advises caution and recommends such  borrowers keep “back-up emergency funds” like a home equity credit line.  The rates can also increase as overnight bank-lending benchmark rates  rise.

MBA’s Fratantoni worries that a further  increase in interest rates could cause problems for borrowers at all  income levels. “People’s credit has been getting better since the  crisis,” he says. “But any time you see a rapid increase in rates,  anything tied to variable rates has some additional risk.” Bankers and  consumer advocates find themselves in rare agreement on the issue.  Easing loan terms too much could be risky for banks and borrowers.