Home loans are tight for credit risks

With a second child on the way, Chris Shields and his wife, Michelle, wanted to move from their two-bedroom apartment in Southern California to a house with more space.

But because their timing coincided with a shakeout in the mortgage market earlier this year, their credit now isn't good enough to get a loan to purchase the house they wanted with no money down.

Rising interest rates and dropping home prices have squeezed a market that had been propped up by risky loans and easy credit during the housing boom. As mortgage bills came due, foreclosures rose, and the easy credit dried up for families like the Shieldses.

"Now we're stuck in the apartment," said Shields, 31, a firefighter who lives in Manifee, Calif. His wife gave birth to baby Gabriella at the end of March, and they are running out of space.

These mortgages, also called "subprime," opened up homeownership to people who otherwise couldn't buy houses because they had weak credit or little money for a down payment.

Unlike traditional 30-year fixed mortgages, these loans are often adjustable, and payments grow with rising interest rates. The nontraditional loans allowed homeowners to borrow large amounts thanks to low initial "teaser" rates, piggyback loans split into two mortgages, or interest-only payments.

In the past, lenders didn't want to give mortgages to people with below-average credit because it was risky, said Kathe Newman, a professor at Rutgers University in New Jersey.

But the explosion of a secondary market for repurchasing mortgages provided more cash to lenders, and investors were willing to take bigger risks. Technology, such as automated credit scoring, also allowed lenders to quickly assess risk, she said.

This year, the volume of subprime mortgages is expected to drop by about 30 percent, said Jay Brinkmann, vice president of research and an economist for the Mortgage Bankers Association in Washington, D.C.

Over the last few months, Louis Allee, a mortgage broker based in Whittier, Calif., said he has seen fewer clients qualify for 100 percent home financing. More potential homebuyers also are having to prove their incomes, and they must show they have the equivalent of several months' mortgage payments in their savings account.

LaVerne Jackson, who sells homes for Century 21 south of Newark, N.J., said one of her clients was set to close one afternoon on a $320,000, four-bedroom home in Linden. But the deal was canceled abruptly just hours before closing when the buyer's mortgage company shut its doors, she said.