By most measures, the housing market should be roaring.
Prices are leveling off. Borrowing is cheap. Even the job market is recovering. And yet home sales are on pace to fall this year for the first time since 2010.
The torturous experience of home buyers such as Kalmele and Aaron Brown may help explain why. The couple, with solid jobs, pre-qualified for a mortgage a year ago and quickly found their "dream house." Just like that, they had a contract.
Then came the hard part. Getting bank approval took endless rounds of paperwork and intense scrutiny from underwriters. To bolster their application, they paid off an old student loan and beefed up their savings. They missed their initial closing date and nearly lost the house to another buyer.
"There were times I wanted to throw in the towel," Kalmele recalled.
The Browns eventually got their loan, closing on the house in February for $350,000. But their four-month ordeal highlights how federal rules put in place after the 2008 mortgage collapse are scaring banks away from all but the safest borrowers — and gumming up the process for everyone.
Federal regulators last week took their biggest steps yet to grease the wheels for borrowers, lowering down payment requirements on federally insured mortgages to 3.5% and issuing new rules for what qualifies as a safe loan. Regulators also promised clearer rules for when banks might be forced to buy back defaulted loans after selling them to investors.
It's a bid to strike the right balance on lending rules, the nation's top housing official told mortgage bankers, and breathe a little more life into the housing market.
"It's in our entire nation's best interest to help more responsible Americans succeed in the housing market by expanding access to credit," said Julian Castro, secretary of Housing and Urban Development. "Some believe that a few years ago, it was too easy to get a home loan. Now, it's too hard."
The cautious climate of the last few years has shut out many of the people who suffered most in the housing crash, said Paul Leonard, California director for the Center for Responsible Lending. Meanwhile, new laws such as Dodd-Frank and new oversight from the Consumer Financial Protection Bureau have improved protections for borrowers, taxpayers and the economy.
"There's a lot of room between where we are today and where we were when we got into this mess," Leonard said. "This was a marketplace that was devoid of any rules and standards. Now, we have rules and standards."
The rules are still often unclear, lenders say, which is why they're making only bulletproof loans. The potential penalties aren't worth the profits, said David Stevens, president of the Mortgage Bankers Assn.
He points to so-called putback rules — which federal regulators have pledged to clarify — that can force banks to buy back mortgages they've already sold off their books if regulators find even minor errors in loan documents that run hundreds of pages.
"On a $400,000 loan, a lender might net $1,500," Stevens said. "But you can be on the hook for hundreds of thousands of dollars. It's inconceivable."
That has lenders fixated on credit scores. The average borrower getting a purchase loan today has a FICO score of about 740, said Sam Khater, deputy chief economist at real estate information firm CoreLogic. In the late 1990s and early 2000s, that number was in the mid-600s — significantly lower than the average rejected file today.
The score has become a proxy for underwriting, Khater said, and lenders are using it to screen out all but the very best borrowers, trading less volume of deals for lower risk.
"You know these borrowers will perform, and there will be less issues," he said. "You manage the uncertainty by keeping the pool of borrowers tight."
But that's boxing potential buyers out of the market, even those with plenty of money to meet down payment and income requirements. A study by the Urban Institute found that higher credit score requirements and extra rules blocked as many as 1.2 million home sales in 2012 — about 1 in 5 potential purchases.
A hard cutoff like that is just too tough, said Clem Ziroli Jr., chief executive of First Mortgage, an Ontario company that specializes in lending to lower-scored borrowers and helped the Browns get their loan in Riverside.
There's typically a reason why someone has a credit score in the mid-600s or lower — maybe a foreclosure, or a job loss that got them overextended on credit cards — but that may be well in the past. In the Browns' case, old debts were a hurdle.
"You could have a 590 credit score from a 5-year-old incident. You've learned your lesson and you're a good credit risk now," he said. "There's good families who should own homes that aren't."
Jennifer Cervantes sees them all the time. She's a homeownership specialist at Neighborhood Partnership Housing Services in Riverside, and runs counseling programs for would-be buyers at the nonprofit.
Many of the people she sees — typically blue-collar families earning $45,000 or $50,000 a year — need work to qualify for a mortgage these days. Maybe they need to boost their credit score or save for a down payment to avoid costly mortgage insurance. About 50 families a month attend Neighborhood Partnership Housing Services' home buying programs, she said; maybe 15 succeed in buying.
"It's hard out there," Cervantes said, but she hopes the financial fitness classes help some get in shape to buy down the road. "We try to encourage people not to give up on their goals."
Still, it's a fine line between removing needless barriers and using public policy to push home sales, said Stuart Gabriel, director of UCLA's Ziman Center for Real Estate. Through much of the 1990s and 2000s, both Democratic and Republican administrations worked to expand homeownership, pushing the nation's homeownership rate to a high of 69% in 2004 — right before the crash. Today, homeownership is below 65%, a 19-year low.
"We didn't really create homeownership," Gabriel said. "We created transitory homeownership that ended in serious hard times for millions of people."
Ziroli, whose bank works with struggling borrowers, said banks need to get back to good underwriting — actually reading applications in depth to analyze the difference between real risks and a borrower's one-time mistake.
"When you get accustomed to serving buyers with 700 credit scores, and then you get one at 580, you don't know what to do with it," he said. "There's been so much reliance on FICO scores and automation that the industry has gotten weak with its ability to analyze credit."