Mortgage rules back to basics

A few years ago, it seemed like anybody who got out of bed in the morning could get a loan.

Zero down payments, sub-prime loans and no proof of income were common practices with some lending institutions.

Times are changing, however, as the major players in the financial markets collapse and the local loan industry returns to rules that had dominated lending for decades.

"It's tightening up to old school," said Jeff Case, a loan officer with Bank of Oregon.

Case said 20 percent down payments have become more common again, documentation to prove income is standard and good credit scores are requisite.

"The pendulum is swinging so far in the other direction," said Case, who writes half as many loans as he used to a few years ago.

Local financial institutions report they are generally in good shape despite the mess on Wall Street, though they've noticed more businesses and individuals struggling as the economy takes a downturn.

With increased requirements to prove income, business owners and the self-employed are often the hardest hit when they apply for a home loan.

Case said the self-employed frequently maximize the number of write-offs on their tax statement, which has the net effect of showing they make very little. "They just don't have the income to qualify," he said.

More flexible loans that don't require stellar credit scores are still available through the Federal Housing Administration, but they come with a catch.

Case said an extra 1.5 percent premium is required up front for mortgage insurance, plus an additional monthly payment. The premium could also go up if the home buyer has a poor credit score.

Wild fluctuations in the stock market are translating into wide variations in interest rates, with jumps of up to a half-point a day.

Case said he recently wrote up a loan for which the interest rate was 5.625 percent in the morning, but jumped to 6 percent by the afternoon.

When market conditions were different a few years ago, a quarter-percent jump could sometimes take months to occur, he said.

The world of business loans also has changed.

Jim Ford, president of PremierWest Bank, headquartered in Medford, said he's seen more businesses that are reluctant to borrow in an economy that has the unusual combination of low interest rates and an overall sluggishness.

"We are seeing a slowing of loan demand," he said. "Borrowers themselves are reluctant to borrow."

His bank has counseled other businesses that don't have the cash flow to justify a loan. Real estate developers and manufacturing companies, for example, are analyzed on their ability to generate enough cash to pay off the loan and continue operations.

Ford said his bank adopted more stringent requirements starting in 2005 when the economy appeared to be getting overheated.

"Frankly, it's allowed us to stay in the lending business," he said.

Ron Fox, executive director of Southern Oregon Regional Economic Development Inc., said he has seen a significant increase in local businesses seeking loans through his organization in the past two or three months.

"They're saying it's tougher to get a loan through a bank," he said.

SOREDI can offer up to $150,000 for equipment or $250,000 for real estate through a special loan program offered through the U.S. Department of Agriculture.

Fox said that in the past 10 years, SOREDI has provided $14 million of these type of loans to 170 businesses.

Because SOREDI operates under different rules, it can offer loans to companies that might not otherwise qualify for conventional loans, Fox said.

Local credit unions have maintained strict standards on providing loans despite trends in the rest of the industry and have generally fared well through the downturn.

Gene Pelham, president and chief executive officer for Rogue Federal Credit Union, said his company continues to have the same kind of rigid lending practices it's had for years.

"Yes, it's slower than usual, but not as bad as it is portrayed in the media," he said.

Pelham said the credit union has had a couple of good months for loans and he said prospects look good into the future. He acknowledged, however, that repossessions of cars and other items have increased recently.

Peggy Mull, executive vice president of SOFCU Community Credit Union, said her company continues to perform well and receives high financial ratings. She noted it has maintained the same requirements for loans despite some of the more exotic lending practices elsewhere in the market.

"We don't participate in interest-only or the sub-prime loans," she said. "As a credit union, we're a little perplexed that the situation has been allowed to get to the level it has."

Mull said she has seen more people who are having economic problems that will require restructuring of their finances.

SOFCU counselors help people learn how to manage their budgets better so they can improve their credit. Sometimes they have to tell people to cut back on their cable television or the cup of coffee they buy every morning. Sometimes the client just can't get the loan he wanted.

"More people are not qualifying today," she said. "I think a lot of people in our local area are hurting."

Reach reporter Damian Mann at 776-4476 or

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