WASHINGTON — Just when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow — even for those with good credit.
Mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans.
That encompasses a wide variety of neighborhoods: McMansions in Scottsdale, Ariz.; luxury Miami condos; 1960 ranch houses in Flint, Mich.; early 20th century kit homes in Metuchen, N.J.
Florida figures prominently on the list of distressed markets being blackballed by mortgage insurers. Only Gainesville and Tallahassee, where price declines and foreclosures have been less severe, have escaped the worst of the insurance tightening. The entire states of California, Arizona, Michigan, Ohio and Nevada have been singled out along with most of Florida.
While mortgage insurance is still available in the Tampa Bay area, home buyers will have to come up with larger down payments to protect against falling property values. One of the largest and best known providers, PMI, requires residents of Pinellas, Pasco, Hillsborough and Hernando counties to put at least 10 percent down on a home purchase. Before recent changes, 5 percent was the requirement.
Banks that lost billions from bad bets in the housing boom are reverting to strict lending standards not seen in nearly 20 years, according to industry data and interviews with lenders.
For new home buyers and those seeking to refinance, it can mean not just higher down payments but a higher bar for credit scores and increased scrutiny of work history. The toughest restrictions are in markets where home prices are falling, though regions where property values are rising are not immune.
"We're in the midst of an epic, broad, sweeping change in the mortgage industry," said Chris Sipe, a loan officer with America East Mortgage in Frederick, Md.
The reluctance to extend credit comes despite a flurry of government initiatives, including steady interest rate cuts by the Federal Reserve, intended to make it easier for would-be borrowers and those facing interest rate resets on their mortgages.
Lenders' wariness threatens to dampen sellers' already dim prospects for the spring home-buying season — and that means more pain for the battered housing sector and the broader economy.
In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans — those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.
The stinginess of banks is showing up in home loan statistics: The value of all new mortgages fell to $450-billion in the fourth quarter of 2007, down 38 percent from a year earlier, according to trade publication Inside Mortgage Finance.
Subprime loans, made to borrowers with poor credit, virtually disappeared from the market, plummeting 90 percent to $13.5-billion in the October-December quarter.
The Federal Reserve has repeatedly cut interest rates, helping borrowers whose mortgages were just about to reset to higher rates and people with student loans.
Reflecting the Fed's efforts, rates on 30-year mortgages dropped below 6 percent this week for the first time in more than a month.
But the long-term impact of the Fed's move is far from certain, and the actions could end up feeding inflation and pushing up long-term rates.
"The credit crunch is much like the movie villain that refuses to die," said Greg McBride of Bankrate.com. "The effects are spilling out, far beyond what was originally seen."
Amid the turmoil, the mortgage industry is playing hardball with borrowers. Wells Fargo & Co. now requires a 25 percent down payment in the most distressed markets, states a document sent to mortgage brokers last month.
Some borrowers who took out home equity loans or second mortgages are being blocked from refinancing. The problem is most common among consumers using different lenders.
Companies that made second mortgage loans are now denying requests to take secondary status in the event of a foreclosure.
While this week's interest rate cut by the Federal Reserve could tempt banks to lend more, experts say they are likely to remain skittish.
"It's going to take time for banks to tiptoe back into the water," said Jefferson Harralson, a banking industry analyst with Keefe, Bruyette & Woods Inc.
Times staff writer James Thorner contributed to this report.