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 for a buyer who owns at least three other rental properties.
•Mortgages to borrowers with scant information at the three national credit bureaus.
•Short-term construction loans that convert to permanent mortgages.
•Adjustable-rate mortgages where the first 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 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 Mac 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 reductions in refinancings where the property had secured a "cash-out" refinancing in 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.Meanwhile, private mortgage insurers, who provide loss coverage for lenders and investors on loans where down payments are less than 20 percent, also are rolling back a variety of products, especially in areas they define as distressed or declining.Genworth Financial, one of the largest insurers, recently told lenders that it no longer will consider applications for second-home purchases anywhere in Florida after May 5. Also as of that date, Genworth will not touch cash-out refis, investment properties, non-traditional credit applications, construction/permanent loans or adjustable-rate mortgages with initial adjustments within the first five years in all "declining/distressed" markets.PMI Group, another high-volume insurer, banned cash-out refis, limited-documentation loans and all mortgages secured by investment properties in "distressed" markets. In non-distressed areas, cash-out refis 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 boosted minimum credit score requirements for "jumbo" loans nationwide to a 700 FICO and will require at least 10 percent down. MGIC, the largest private mortgage insurer, recently eliminated coverage nationwide of "option-ARM" loans that have scheduled or potential negative amortization features that increase, rather than reduce, borrowers' principal monthly debt. In the boom years, option-ARMs were wildly popular in major metro markets. The company also no longer will insure cash-out refis using limited documentation, temporary rate buy-downs on investment real estate and non-traditional credit applications to buy second homes.Lenders and insurers are studying the sources of their greatest losses from mortgages made between 2003 and 2007. Where they see inordinate risk, they are eradicating it.