Are Lending Standards Too Tight?

This article made me think back to a time just a few short years ago when lending standards were quite a bit different. In fact, some programs were almost completely FICO score driven, required no income documentation and in some cases required no assets. Fast forward a few years and some would say the standards are not only too tight but are inhibiting the ability for some to buy and further pushing back a real estate recovery. What do you think?

Home ownership affordability is at a record high due to low home prices and all-time low mortgage rates. But housing experts have blamed banks’ tightened lending standards for keeping more buyers on the sidelines because they are unable to qualify for financing.

Lending standards increased sharply after the financial crisis in 2008, and even after the recession ended in 2009. Lenders have yet to ease their stricter standards, according to a report by Goldman Sachs economists Hui Shan and Jari Stehn.

Why? The researchers say it’s mostly because there’s less money available to lend.

“During the housing boom, as brokers produced a flood of new mortgages, Wall Street bankers churned out a torrent of mortgage-backed bonds for investors waiting to snap them up,” an article at notes, in describing the study’s findings. “That market has all but vanished; 90 percent of new mortgages written today are backed by the government.”

Also, researchers found that lenders are swamped with more paperwork, which is also causing delays in processing. Many lenders have issued stricter documentation requirements before they’ll approve a loan. Nowadays, nearly 90 percent of mortgage applications require “full documentation” before getting approved. From 2000 to 2006, less than 60 percent of applications required “full documentation,” researchers found.

Source: “Tight-Fisted Mortgage Lenders Pressure Home Sales,” (Jan. 27, 2012)

Editor’s Note: Another reason banks have tightened up their lending is because Fannie Mae and Freddie Mac are requiring banks to repurchase some of the loans they’ve made. As reported by Bloomberg News, banks don’t want to get hit with more mandatory repurchases, so they have added “overlays” (such as minimum downpayment, debt ratio, etc.) to FHA, Fannie, and Freddie standards, and are only making the most conservative loans.

Source = RealtorMag

I do agree with the editor’s note. The threat of potentially having to buy back a non-performing mortgage has caused quite a few lenders to have higher standards (known in the industry as guideline overlays) than what is technically required. Even so qualifying for a mortgage these days isn’t impossible nor nearly as hard as the mainstream media would make it out to be. A phone call to a reputable and trustworthy lender should be your starting point and if you don’t know one we would be happy to give you a referral.

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