Get ready for a mortgage maze

The first time Jeff and Dana Prottas applied for a mortgage they weren't surprised that they might have to jump through a few hoops to get an OK from the bank, so they worked hard to improve their credit score.

So when they backed away from a complicated deal in which they tried to buy a house in suburban Minneapolis from a borrower who owed more than the house was worth, they thought that getting a mortgage on another, less-expensive house would be a breeze, as they had already been approved.

They were wrong. Between canceling that deal and finding a new house, the mortgage markets continued to unravel, access to credit tightened and the lender who had approved them several months earlier was now asking for a bigger down payment and more detailed documentation, including photocopies of their Social Security cards.

Although buying conditions are prime -- mortgage interest rates are still near historic lows and home prices are coming down at a steady clip -- coming changes resulting from the continuing credit crunch are going to make getting a mortgage more time-consuming and costly for some borrowers.

That's part of the reason that U.S. mortgage applications, particularly for refinancings, have fallen to their lowest level since 2000 -- and it's why a housing recovery isn't going to happen anytime soon.

"The banking industry is running the housing industry," said their Realtor, Sheri Fine of Edina Realty in Minnesota. She says that creditworthy buyers are paying a price for reckless underwriting standards of the past couple of years. "It's almost like the wrong people are getting punished."

Despite recent dramatic declines in the value of Fannie Mae and Freddie Mac, the largest providers of mortgage funds in the nation, mortgage money is still flowing. During the first half the year, Freddie Mac purchased more than $300 billion in mortgages, and at Cornerstone Mortgage, loan officer Ronny Loew said business has steadily improved in recent months as sellers slash prices.

He said that, while access to credit is more difficult and the options are dwindling, the higher cost of getting a mortgage is being offset by lower home prices.

Still, lenders are continuing to look for ways to offset the risks of being in the mortgage business these days, most notably the uncertainty of not knowing whether falling prices have bottomed out.

Because of that, starting in early November, Freddie Mac and Fannie Mae will double the delivery fee they charge their lenders, who often pass that along to borrowers, from 0.25 to 0.5 percent. On a $185,000 mortgage with a 6.5 percent interest rate, that would translate into an increase to 6.625 percent.

Freddie Mac spokesman Brad German said that's a small price to pay, considering the declines in home prices.

Despite the woes associated with Freddie Mac's recently plummeting stock price, German said that the company has not implemented across-the-board increases in the cost of getting a mortgage.

The Federal Housing Administration (FHA) is making similar changes. Because of a congressional mandate, it will temporarily increase its down-payment requirement from 3 to 3.5 percent as part of an unusual shift to risk-based pricing aimed at reducing losses from mortgage delinquencies.

After becoming virtually irrelevant during the days when no-cost, zero-down and low-documentation conventional mortgage products were common, FHA mortgages now are golden.

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)