How an Im­per­fect Bor­rower Found a Loan

Mort­gages ▶ Years af­ter the fi­nan­cial cri­sis, credit is still tight for some ▶ “Banks are so scared … they are triple-check­ing ev­ery sin­gle thing”

Bloomberg Businessweek (North America) - - Markets / Finance -

Ruth Paloma Rivera just bought her first house, a three-story build­ing in North Philadel­phia. To get there, she had to push her way through a pa­per­work ob­sta­cle course.

One bank wanted a copy of her di­ploma from Rut­gers Univer­sity. It asked for years of tele­phone bills, she says, and a let­ter from her credit union to en­sure she was in good stand­ing. Be­cause of a mis­take on her ap­pli­ca­tion, the bank also re­quested ver­i­fi­ca­tion of her per­ma­nent res­i­dency sta­tus. Rivera, 29, was born in Puerto Rico, which makes her a U.S. ci­ti­zen. “It has been a re­ally long, daunt­ing, hard process,” she says.

Her ex­pe­ri­ence, and that of mil­lions of other Amer­i­cans, is part of what Fed­eral Re­serve Chair Janet Yellen calls a “head­wind” for the econ­omy: Even with low mort­gage rates, it’s hard for many to get a loan. Home­own­er­ship— one way Amer­i­cans build up wealth— has be­come more elu­sive. The home­own­er­ship rate fell 5.1 per­cent­age points from 2006 through the end of 2015, to 63.8 per­cent.

There are mul­ti­ple causes of tight credit. Bad mort­gages were at the epi­cen­ter of the 2008 fi­nan­cial cri­sis, and lenders are more guarded about risk. Reg­u­la­tion has also got­ten tougher. The 2010 Dodd-frank Act di­rected the U.S. Consumer Fi­nan­cial Pro­tec­tion Bureau to es­tab­lish stan­dards for mort­gage un­der­writ­ing, re­quir­ing banks to ver­ify a bor­rower’s abil­ity to re­pay.

Some banks are sim­ply step­ping away from riskier bor­row­ers. Jpmor­gan Chase re­cently told in­vestors its mort­gage orig­i­na­tions fell in 2015, to $106 bil­lion from $166 bil­lion in 2013. Only 16 per­cent of its bor­row­ers had a loan-to-value ra­tio of 80 per­cent or higher, vs. 39 per­cent in 2013, sug­gest­ing that Jpmor­gan wants bor­row­ers to put more money down on a house. El­iz­a­beth Seymour, a spokes­woman for the bank, de­clined to com­ment.

“Banks are so scared right now, they are triple-check­ing ev­ery sin­gle thing,” says Lau­rie Good­man, di­rec­tor of the Hous­ing Fi­nance Pol­icy Cen­ter at the Ur­ban In­sti­tute in Wash­ing­ton.

Bor­row­ers were deeply scarred by the re­ces­sion, too. “While peo­ple are back to work, they’re not at the in­come level they were see­ing be­fore the cri­sis,” says Pa­tri­cia Has­son, pres­i­dent of Clar­ifi, a non­profit credit-coun­sel­ing ser­vice in Philadel­phia. That, plus pre­vi­ous debt loads, makes it harder to meet banks’ re­quire­ments.

Rivera ac­cu­mu­lated $27,000 in debt to get her de­gree and grad­u­ated in 2010, when the U.S. un­em­ploy­ment rate was 9.5 per­cent. “You couldn’t even get a job at Mcdon­ald’s,” she says. She found work as a sub­sti­tute teacher but even­tu­ally had to stop pay­ing her stu­dent loans be­cause she wasn’t earn­ing enough to cover them and her other ex­penses. Her credit score plum­meted. A wake-up call came when she ap­plied for a credit card to buy an Ap­ple com­puter. She was de­nied. “That sum­mer I started my credit jour­ney,” she says.

Her goal was big­ger than a new Mac. She’d watched peo­ple with money move in and boost prop­erty val­ues in Philadel­phia’s Fish­town neigh­bor­hood. Rivera wanted to own some­thing, see it grow in value, and then own some­thing more. She would start with a bet that gen­tri­fi­ca­tion would spread be­yond Fish­town—with its craft-beer pubs and cof­fee shops—into the nearby neigh­bor­hood of Kensington.

To get a loan, Rivera knew she’d need to im­prove her credit score. She moved in with her mother to cut ex­penses and opened a credit union ac­count with­out a debit card, to make

“We sit here and con­stantly com­plain that we have to put peo­ple through the wringer.” —— Tom Camp­bell, Merid­ian Bank

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