More Lenders Tighten Standards

WSJ - 9.29.05 - Lenders Tighten Credit Standards

As far back as February of this year at the KLSX Real Estate Summit, Doug and I have been warning consumers that as the housing market slows lending guidelines are going to stiffen.  This article is more confirmation that major banks are starting to tighten lending standards on mortgage money-especially the riskier loans that have fueled the speculative excesses. Determined to reduce the number and improve the quality of riskier option ARM loans, Washington Mutual is raising the qualifying standards and increasing the margins for those loans. After the teaser rate has expired, borrowers must qualify for an interest rate payment of 6% to 6.25%--up an entire point from 5.25%.

Countrywide, Downey, H&R Block and New Century financial are among a handful of lenders who have begun tightening the reins on easy money. It's only a matter of time before other mortgage lenders follow their lead.

In addition to tighter guidelines, rising short-term interest rates have made option ARM loans less attractive to borrowers. The payment difference between a fixed rate loan and option ARMs is currently less than half of a percent.  Borrowers are rightfully concluding that that is too small of a discount to justify exposing themselves to the risks of a monthly variable interest rate and the potential for negative amortization.   

The bottom line:

1. Homeowners are going to find it harder to borrow themselves out of trouble as lending guidelines tighten and equity doesn't build up as fast, or disappears altogether(NY Times - 10.2.05 - My House, My Piggy Bank).
2. Without easy money, home sales will slow. If lenders won't qualify as many borrowers, the "able" demand for homes will shrink, limiting price pressures.
3. Look for a wave of foreclosures beginning in 2007 when $1 trillion in mortgages will adjust to market terms from their current introductory or teaser rates (LA Business Journal - 10.3.05).

Investors, homeowners with little or no equity and risky mortgage holders have a decision to make and time is growing short. We strongly advise a fixed payment or get out from under the home if you can't afford the payment at a fixed rate.