Easy money no more

Instead of its normal home page, the Web site of mortgage lender First Magnus Financial now reads, "In light of the collapse of the secondary mortgage market, First Magnus will not fund any future mortgage loans."

Think the global credit crunch is something distant?

Not if your loan was in the pipeline from First Magnus, which made $30 billion in mortgages last year and employs 5,000 people, all of whom were sent home from work -- apparently for good -- on Thursday.

The First Magnus episode is becoming all too common, and that phenomenon is making itself felt in Southwest Florida, where real estate is the king of the hill.

"A lot of lenders I used to work with are going out of business," said Marta Grande, a Sarasota mortgage broker who had counted on First Magnus for quite a few loans up until this week. "I would have to say about 40 percent."

The credit crisis is like a hangover after a party that was just too good to be healthy.

"All of us in the food chain -- bankers, builders developers, mortgage lenders -- I would say we all got a little bit intoxicated with the market," said Jody Hudgins, Florida executive for the First National Bank of Pennsylvania, which operates in Sarasota and five other Florida communities.

The meltdown -- besides its obvious repercussions on Wall Street -- has made it harder and harder for people to get a home loan, much less refinance one of the more exotic mortgages so popular in the boom years.

"As far as getting a loan, it is a real, real struggle to get somebody with good credit a loan," Grande said.

Even very prosperous investors like Sarasota's Harvey Vengroff, founder of the world's largest debt collection agency, are running into extreme makeovers on their real estate loan paperwork.

"One is for $5.7 million on a property that was a no-brainer a couple of months ago," groused Vengroff. "Now they're asking for more information and checking their verbiage and doing other stupid stuff."

In the current credit crisis, the financial world seems to be reliving the old childhood song about the knee-bone being connected to the thigh-bone. The media has put nearly all its attention on defaults for so-called subprime mortgages -- loans made to customers with below-average credit ratings. However, less exotic creations like "no-documentation loans" for those with high credit ratings and big bank accounts, and even normal real estate loans for investors, are becoming rarer.

"It all kind of went down with the subprime, but that's all everybody hears about," said Max Shaw, a residential lending officer at People's Community Bank in Sarasota.

Like Grande, he said that so-called "Alt-A" loans, where the buyer had very good credit and the lender was willing to take the borrower's word on income without checking it, have nearly vanished.

"It is just getting back to the way it should be," Shaw maintains. "It is just that you are going to have to have decent credit and you are going to have to prove you have what you say you have."

Choice or no-choice?

In 2004 and 2005, lenders fell over one another to provide loans with the lowest front-end cost possible.

One of these was the option ARM, in which borrowers had three choices every month: a full payment of principal and interest, an interest-only payment, or a minimal payment like a customer would see on a credit card bill.

Borrowers who took the easy way out saw the unpaid interest stacked on top of the original loan amount. That happened until the loan hit a pre-set trigger amount. Three or four years into the loan, or after the trigger gets pulled, the choice turns into a no-choice fixed-rate loan with less than 30 years left on it.

The nation is still about 18 months away from feeling the full impact of those loans, because they reached their peak popularity about two years ago, said Sarasota's Bob DeCecco, the former head of Opteum Financial Services' Florida operations who left the company this week.

Complicating matters further, those option ARMs were frequently used to dish out 100 percent financing.

"So these individuals got 100 percent loan-to-value loans, on properties that are now depreciating, with interest rates increasing, and a tighter credit market, in which they would not even re-qualify for that program," DeCecco said.

"They have to refinance, and they can't."

Want a home loan? Shaw, the People's lending officer, said he has plenty of money to lend -- for those planning to move into the home. "You can get a 30-year fixed right now around 6.5 percent with no points."

OK, but what about an investor seeking to buy and then rent out a bargain home being made available by a desperate seller?

"I couldn't even quote you investor money," Shaw said.

If someone could get an investor loan at People's Community, it would probably be at a point or a point and a half higher than the primary residence quote, which would puts it at 7.5 percent to 8 percent, Shaw said.

Lenders have also put the kibosh on investor loans without substantial down payments.

"Twenty five percent cash, minimum," Shaw said, adding that even then, "they are hard to get done. You've got to have stellar credit, a solid profile. It is just extremely tough right now."

Most of this tightening has come within the past two months, he said. "Where you started seeing all these lenders drop out, there is when every other lender started tightening up."

Collateral damage

The collateral damage from cheap money turning expensive is definitely not limited to consumers.

The run-up in volume and prices on expensive homes during the first half of the decade caused developers and builders to bolt herd-like to grab property for future construction.

In nearly every case, there was a banker at the front end making a construction loan with an interest payment reserve to tide the developer over while he or she prepared the property for eventual sale.

With those projects now getting postponed in Southwest Florida's slow housing market, those interest payment "set-asides," in some cases, are now running out, said Hudgins, the First National Bank of Pennsylvania executive.

"The collision is when our developer friends for three years have had these interest reserves abundantly provided for, and now there is no more room in the property for additional interest reserves due to the declining property values," Hudgins said.

A lot of those real estate speculators and developers will not have the money to carry the debt. Banks will then be faced with "limited options," one of which is foreclosure, he said.

"Nearly every banker in Florida got seduced," Hudgins said. "What we never put into the equation was how much of the purchasing was fueled by easy money -- cheap money, foolish money -- from lending sources that were desperate to meet their production needs."

Cash is king

As in any credit crunch, this one included, cash is king.

Vengroff is having a field day buying up his favorite kind of property: apartment buildings aimed at tenants with moderate income.

"I haven't even been in town and I bought two this month," said Vengroff, speaking on his cell phone from Connecticut.

His latest deal is a 21-unit apartment building at Lime Avenue and Sixth Street, "a property somebody else was failing on," he said. It was appraised last year for $1.15 million. Vengroff bought it for $850,000 and got a $600,000 loan from a local bank.

"In this case, we needed $250,000, which is about a third of the purchase price, which is the way we do most of our deals," Vengroff said.

Those would be have been tough terms for most buyers even during the boom. But back then, it was simple to find lenders with easier terms.

"Those people are losing their properties right now, and I think that is the difference," Vengroff said.

Vengroff's latest deal seemed to cheer up Hudgins.

"On the surface that seems like a very shrewd, wise investment," the banker said. "I am betting that he may be netting 15 percent."