With a second child on the way, Chris Shields and his wife, Michelle, wanted to move from their two-bedroom apartment in Southern California to a house with more space.
But because their timing coincided with a shakeout in the mortgage market earlier this year, their credit now isn't good enough to get a loan to purchase the house they wanted with no money down.
Rising interest rates and dropping home prices have squeezed a market that had been propped up by risky loans and easy credit during the housing boom. As mortgage bills came due, foreclosures rose, and the easy credit dried up for families like the Shieldses.
"Now we're stuck in the apartment," said Shields, 31, a firefighter who lives in Manifee, Calif. His wife gave birth to baby Gabriella at the end of March, and they are running out of space without options for a house.
These mortgages, also called "subprime," opened up homeownership to people who otherwise couldn't buy houses because they had weak credit or little money for a down payment.
Unlike traditional 30-year fixed mortgages, these loans are often adjustable, and payments grow with rising interest rates. The nontraditional loans allowed homeowners to borrow large amounts thanks to low initial "teaser" rates, piggyback loans split into two mortgages, or interest-only payments.
In the past, lenders didn't want to give mortgages to people with below-average credit because it was risky, said Kathe Newman, a professor at Rutgers University in New Jersey who has studied the subprime market and foreclosures.
But the explosion of a secondary market for repurchasing mortgages provided more cash to lenders, and investors were willing to take bigger risks. Technology, such as automated credit scoring, also allowed lenders to quickly assess risk, she said.
This year, the volume of subprime mortgages is expected to drop by about 30 percent, said Jay Brinkmann, vice president of research and an economist for the Mortgage Bankers Association in Washington, D.C.
Over the last few months, Louis Allee, a mortgage broker based in Whittier, Calif., said he has seen fewer clients qualify for 100 percent home financing. More potential home buyers also are having to prove their incomes, and they must show they have the equivalent of several months' mortgage payments in their savings account.
LaVerne Jackson, who sells homes for Century 21 south of Newark, N.J., said the mortgage situation is slowing her business.
In early March, one of her clients was set to close one afternoon on a $320,000, four-bedroom home in Linden, near Newark Liberty International Airport. But the deal was canceled abruptly just hours before closing when the buyer's mortgage company shut its doors, she said.
Jackson said the housing market will suffer as buyers work to establish better credit.
"They will have to do a lot of credit repairs before they can qualify," Jackson said. "It also means the houses will sit a little longer."
New Jersey in April barred two companies, Atlanta-based SouthStar and LoanCity of San Jose, Calif., from doing business in the state because they lost financial backing and weren't able to fulfill existing loan obligations, said Jim Gardner, a spokesman for New Jersey's Department of Banking and Insurance.
The month before, the state also barred New Century Financial Corp., which pulled funding for 59 home loans and eight with the company's Home123 Corp. unit that had already closed. The loans have since been placed with other lenders, Gardner said.
Irvine, Calif.-based New Century had taken an additional 451 applications that did not close and Home123 had 293, and they have been directed to other mortgage companies.
The shakeout of the market could have positive benefits, some housing advocates say. Ira Rheingold, executive director of the National Association of Consumer Advocates, said people won't qualify for loans they can't afford.
"People will have the opportunity to buy homes they can sustain, not the absurdities we've been seeing," he said. "What's going to happen is only good for homeowners and consumers."
Some people who got into trouble with loans they couldn't afford have since refinanced with better rates.
Osvaldo Rodriguez, a 40-year-old postal worker, purchased a three-family house in Newark last June with about $1,000 down and $300,000 broken into two mortgage loans. His monthly payment was about $2,200 and rising, more than he could afford on an annual income of about $60,000, including veterans disability payments.
"It was tight, very tight," he said, sitting on a couch with a clear plastic slipcover in his living room. "I was paying it, but I was kind of struggling."
Rodriguez's home didn't go into foreclosure because he sought help from ACORN Housing Corp., a housing advocate. He said he had a good credit rating, and he recently refinanced to a lower mortgage rate from a bank, which made his payments more affordable. He also now has tenants to boost his cash flow.
Other borrowers haven't been as lucky.
Deborah Beatty recognizes that she and her family could lose their home in Jersey City, N.J., across the Hudson River from New York, because they can't afford the mortgage. The newly constructed three-level home offers a view of the Manhattan skyline and the Statue of Liberty from Beatty's master bedroom window.
"I'm going to miss that," said Beatty, 53, who collects disability payments and does not work. "When I come in, I like to see the lady (the statue), especially when it's a beautiful clear night."
Her 29-year-old daughter, a graduate student with an annual income of less than $20,000, qualified for a mortgage of $600,000 with no money down, split into two different loans at 8.75 percent and 12.5 percent interest rates.
With income from tenants, which didn't come right away, Beatty's daughter thought she could afford monthly payments of nearly $5,000.
But she hasn't made a mortgage payment in more than three months, and she's receiving letters threatening foreclosure.
Beatty's daughter had to take out a nontraditional loan because she would not have qualified to borrow that much money through a traditional 30-year-fixed mortgage, said Judith Brzuskiewicz, a loan counselor with Citizen Action, a nonprofit advocacy group that is helping the Beattys and other families avoid foreclosure.
Beatty acknowledged the mortgage was probably too good to be true, and now her house is on the market. The family wouldn't be able to afford buying another house and would likely rent, she said.
"It's embarrassing," Beatty said. "It hurts your pride, your respect."
