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2 big firms add to crisis in mortgages

Largest lender sets limits; another halts new loans

Countrywide Financial Corp., the nation's largest mortgage firm, said yesterday it has "tightened" up on its lending, and another large provider said it would stop making new loans altogether, deepening the crisis in the nation's mortgage industry.

Countrywide, which has 29 offices in Massachusetts, said it would tap its entire $11.5 billion line of credit because the investors who normally provide financing for mortgage companies' loan operations have bolted from the credit markets out of fear that defaults among home-loan borrowers may get worse.

The California-based company also said it will limit new lending to only those borrowers whose loans qualify for purchase by the government-sponsored companies Fannie Mae and Freddie Mac, which generally are the safest customers.

Meanwhile, First Magnus Financial Corp., based in Tucson, which purchases mortgages from loan brokers and is one of the 10 largest mortgage wholesalers in New England, yesterday said it would no longer fund new loans. First Magnus, which has offices in Needham and Lawrence, said the "collapse" of the investment market for mortgages has left it "with no viable alternative" but to cease lending.

The developments involving two industry giants left many other players scrambling. Brian Koss, managing partner of Mortgage Network Inc., a national firm that packages mortgages for sale to investors, likened the efforts by companies in the industry to keep loans flowing and mortgage deals funded to battlefield triage performed by military surgeons.

"It's like a M.A.S.H. unit," Koss said, invoking the popular television show. "You're just trying to save deals from falling apart and keep deals together. On our back end, the investors you sell the loans to -- the Wall Street firms -- are changing guidelines on a daily basis."

The company's developments should not affect borrowers with Countrywide loans, industry specialists said. But even the whiff of a problem is throwing a scare into Countrywide customers and other home-loan borrowers, said Michael Dunsky, a loan officer for broker Mortgage Master in Walpole. He has received calls from Countrywide borrowers asking whether their mortgages are affected and from real estate agents concerned about pending mortgages. His firm is prepared to fund a mortgage itself, if one of its lenders backs out.

"It's scary to think a company the size of Countrywide, that something could shake out and happen overnight," he said.

For other home-loan customers, the industry problems may lead to higher mortgage costs, or even difficulties in getting a loan at all, real estate and mortgage industry specialists said. In recent weeks, many mortgage lenders have become more selective in granting loans. Rates for jumbo mortgages, those above $417,000, have jumped more than one percentage point, to 7.85 percent, compared to around 6.625 percent for conventional loans.

Some applicants with spotty credit or hard-to-document income may now find they have to go to greater lengths to show they are a good credit risk, and may not get a loan if they cannot, these specialists added.

Countrywide's funding issues triggered another wild ride in global stock markets yesterday. Markets in Europe and Asia were down 2 to 3 percent, and at one point yesterday the Dow Jones industrial average had fallen 340 points, or around 3 percent, before rallying and closing down just 0.12 percent, at 12,845.78. Shares in Countrywide, meanwhile fell 11 percent, or $2.34, to $18.95.

The mounting mortgage crisis was first fueled by sharply rising defaults of subprime mortgages, but has spread to the broader home-lending market.

Like falling dominos, analysts said, the mortgage industry problems are sure to pitch the nation's housing market, already slogging through a slowdown, into a steeper decline as many potential buyers decide to wait out the crisis.

"There's a real confusion in the market," said Richard Nordlund, president of Money House Mortgage, a Cranston, R.I., broker. And Rosemary O'Neil, vice president of mortgage broker Conway Financial in Norwell and president of the Massachusetts Mortgage Association, said some house hunters are likely to see the industry shake-up as benefiting them in the long run.

"They may decide, 'Let's wait until the prices go down some more'," she said.

Patrick Newport, an economist for Global Insight, an economic consulting firm in Waltham, said yesterday that he now thinks a recovery in the nation's housing market will be delayed, to the middle of 2008, instead of early next year as he previously had forecast.

With its deep penetration of the nation's mortgage markets, Countrywide is a bellwether for the industry, and whatever trouble it experiences raising money, or cutbacks it makes in loans, could ripple through the sector.

Several analysts who follow the company raised the possibility of insolvency. But in a statement yesterday Countrywide said the $11.5 billion borrowing will allow it to keep making loans.

"Countrywide has taken decisive steps, which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise," Countrywide president David Sambol said.

The credit crunch has already claimed dozens of mortgage companies that have either gone out of business or filed for bankruptcy protection, including American Home Mortgage in New York and New Century Corp. of California, since defaults among borrowers of subprime mortgages first began climbing last year.

Remaining lenders have quickly stopped or slowed funding for subprime and jumbo loans because of market conditions, said Jeffrey Lewis, chairman of the board of directors of Generation Mortgage Co., based in Atlanta.

"As bad as this is, I don't think it will have an effect of literally shutting down" mortgage lending, said Lewis, a former mortgage-securities trader. "It's just that the price gets to a point where" borrowers "don't like it. Lenders will raise rates to a point where they won't be competitive and they won't lend anymore. And there will be some that will do that."

Paul Havemann, vice president of HSH Associates, a New Jersey-based financial information provider, said new borrowers will likely have to shop around more to find competitive rates and willing lenders. "They want to see stated incomes, stated assets, and a pretty good credit score. If you've got those things, you're in like Flynn," he said.

Moreover, Havemann said he expected the turmoil in the credit markets that support the mortgage industry will eventually subside as those investors get a better handle on the extent of problem loans.

"The market's gotta go on," he said. "It can't stay frozen forever."

Kimberly Blanton can be reached at blanton@globe.com; Se Young Lee at vlee@globe.com.

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