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 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 in Golden Valley, 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.

"I was almost on my way to the doctor to get a finger pricked to give blood," Jeff Prottas said.

Though 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. 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."

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.

"It will be a bit more painful for everyone while the industry works to restore confidence," Loew said.

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.

Rather, the company has shifted to a nuanced, risk-based pricing strategy aimed at helping certain classes of borrowers.

"We are constantly analyzing the market and making adjustments," German said. "It's not all one-way thinking."

Similar moves at the FHA

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.

In June 2007, the FHA provided funds for 625 borrowers in Minnesota, but as access to those Wall Street-funded mortgages dried up, that number increased to 2,200 last June and continues to rise.

All of these changes, including increasing demands for more detailed documentation that adds time and expense to the process, come at a time when many borrowers are having to offer unplanned and larger discounts on the homes they're selling.

Prottas, for example, said that he sold their townhouse for $25,000 to $30,000 less than they had planned, leaving them with little money for a down payment on their new home. They also spent about $2,500 on temporary housing, appraisals, inspections and other things while they waited for their offer to be accepted, but felt lucky that they sold their place for more than they paid for it -- an achievement in a market where sellers are increasingly upside down on their mortgages.

Paul Schuster, vice president of Marketplace Home Mortgage in Edina and the president-elect of the Minnesota Mortgage Association, said that the same pendulum swing that put borrowers into risky mortgages has swung far the other direction, but appears to be showing some signs of coming back to the middle.

"There has been a continual tightening of guidelines, down payment requirements and credit standards," he said.

The irony of having to fight for a mortgage at a time when the housing market decline threatens the stability of the broader economy is not lost on Prottas.

"We are responsible individuals who try to make good choices," he said. "I don't understand why in today's economic climate the banking industry is making it more challenging to buy a home."