SAN FRANCISCO (AP) -- Mortgage broker Ed Smith Jr. has been arranging home loans for 24 years and it's never been tougher for him to close a deal than during the past few weeks of turmoil.
As more lenders collapse, the skittish survivors are raising their rates and changing the rules for getting a loan every few hours as they scramble to stay alive. The upheaval has made it virtually impossible to secure financing for scores of borrowers who would have easily qualified for mortgages just a few months ago, creating a lending drought likely to deepen the housing slump.
"You have a ripple effect in the marketplace that is devastating," said Smith, who is based in San Diego.
The fallout figures to be especially hard on homeowners facing dramatically higher payments on exotic mortgages that they obtained two or three years ago. These mortgages began with bargain-basement, or "teaser," interest rates that offered extremely low payments so borrowers could buy a home and refinance later.
But falling home prices and stricter lending criteria have chained these borrowers to their current mortgages, lumping them with higher payments that they can no longer afford.
"I have three borrowers who desperately need to refinance and they aren't going to be able to do it. They are going to lose their homes," said Patrick Schwerdtfeger, a Walnut Creek mortgage broker for Windsor Capital.
Orange County mortgage broker Jack Williams has seen nine mortgage deals unravel in the past 11 days. He has since been able to secure financing for two of the borrowers, but "it doesn't look real promising" for the others as lenders hunker down. "You can have one rate sheet in the morning, then it will change at noon and then it will be completely different again at 5 p.m."
Borrowers with blemished credit records and inadequate paperwork to verify their incomes are having the most trouble getting mortgages.
But the lending crackdown also is affecting more creditworthy borrowers who need to borrow more than $417,000 so they can buy or refinance homes. These so-called "jumbo" loans are common in expensive housing markets like California, where a mid-price home sold for $478,000 in July.
In the past few weeks, the jumbo rates have climbed 0.75 to 1.25 percentage points above the rates for mortgages below $417,000. That higher premium has put the financing out of reach for many borrowers.
The daunting conditions are shriveling the incomes of mortgage brokers, some of whom are making about half the money that they were raking in a year ago, said Thomas Kaiser of Empire Equity Group in San Jose. "Normally, this would be a busy time of the year, but it's completely opposite."
The lending slowdown is bound to drive some mortgage brokers out of the industry and prompt layoffs in other related businesses such as title insurers, predicted Wayne Repich, founding partner of Vanguard Mortgage & Title Inc. in Concord.
"This is the worst I have seen in my 19 years in the business," Repich said. "I'm usually an optimist, but this downturn really has me concerned."
The difficult market conditions could work to the advantage of prospective home buyers who can negotiate the current lending gauntlet and qualify for a mortgage. As home sellers find it more difficult to find qualified buyers, people with financing should be able to negotiate better deals, brokers said.
"There are good bargains for people with reasonably good credit and a little money in the bank," said Ilene Cohen, a broker with First Call Mortgage Inc. in Andover, Mass.
To qualify for a loan, borrowers generally need a credit score of 700 to 720 (on a scale of 850) and enough money saved for a 10 percent down payment. They also need to be able to verify their incomes.
These criteria aren't radically different from the demands that lenders made through most of the 1980s and the first half of the 1990s. But the standards loosened as Wall Street hedge funds and other investment vehicles became more willing to buy high-risk mortgages bundled into securities. That emboldened lenders to offer 100 percent financing to borrowers who could list just about any income they wanted without any corroboration.
"We are now going back to the old days of lending," Williams said.
While the more conservative approach eventually may bring more stability to the market, some observers say the shift is happening too suddenly.
"It would be like a credit card lender suddenly telling you that if your credit rating isn't 'XYZ,' you have to cut up the credit card and pay all the debt you owe on it," said Jonathan Logan, a Portland, Ore., broker with BetterWorldMortgage.com
Even borrowers with solid credit are feeling anxious during these uncertain times.
Bridget Hughes, 30, is prepared to put 20 percent down for a town house in the Seattle area and appears to have a good enough credit record to secure a $280,000 mortgage. But she still frets that the financing might fall through if there are any unforeseen delays in her application. "I am nervous," she said Friday. "When I made an offer on a home, I felt like coming into my office and shouting, 'Look what I am doing!' but decided not to. I am trying not to fall head-over-heels in love with this home in case something goes wrong."