New claims are being made that the government is working to make it easier for consumers to get home loans. Real estate has been such a crucial part of recent economic growth that fluidity in the housing market must continue. Making home loans easier to receive is only natural. It can help the economy gain the traction it has so desperately needed. Getting a head start on this may prove to be far more important than many realize, as the stock market and tech world appear to be ripe for a downturn of their own. So with their eyes on the future, government officials appear ready to make more Americans homeowners.
Most, perhaps with the exception of some landlords and institutional real estate funds, are certainly looking forward to easier access to lending, mortgage credit, and higher LTVs. In fact, most are now more interested in higher loan to value mortgages than low interest rate mortgages. Still, the big question remains: will it be easier for the average home buyer to secure a loan?
Former Fed chairman Ben Bernanke was recently turned down for a mortgage loan. This appears to have woken up those at the top of the food chain and pushed them to finally commit to an easement in lending practices. After all, if Bernanke couldn’t get a loan, how many worthy consumers were being denied? According to coverage from the Wall Street Journal, and commentary from the Housing Policy Center at the Urban Institute, “big changes” are in the works. Specifically, a new policy is going into effect that will lower lending standards and criteria for getting home loans with Fannie Mae and Freddie Mac backing.
However, after researching the topic, less may have changed than originally anticipated. The big victory being heralded by those at the top has to do with clarifying the new rules. Uncertainty has certainly proven to be an issue in the past, and a notable roadblock in all types of markets. However, with so many working parts and other factors at play, the promises of another 1.2 million loans being made each year and faster closing times may not be that significant. More home sales is great, but easing in the process will also increase how busy lenders are. Seeing as how many big banks recently slashed thousands of mortgage department employees, this could make loan processing times even longer.
Looking at the bigger picture, there is certainly much more holding back access to home loans than the previously mentioned measures. Substantial reduction in underwriting standards will be required to meet the needs of today’s average borrower. The vast majority of consumers and potential home buyers have credit which is far weaker or in worse condition than before the crisis, and during the days of sub-prime loans.
Banks are currently dealing with many challenges. Many have seen deposits fall after a lack of trust and poor customer service practices. Moreover, a lot affluent individuals have chosen to get into direct lending to real estate investors versus using banks as an intermediary which soaks up the bulk of returns. According to data compiler Distressed Pro and the latest accounting from U.S. banks and credit unions, they still have a couple hundred billion dollars in REOs and non-performing loans on the books. The actual number could be in the trillions, given the recent spate of transfers to servicers and non-bank entities which some analysts and government watchdogs have claimed are efforts to shirk responsibilities. With interest rates so low, there is also little motivation to loan. There is ongoing fear among big bank lenders that they’ll continually be hauled into court and be forced to settle for all types of claims to the tune of many more billions of dollars.
On the bright side, many subsequent lending and credit channels are loosening up, and more non-conventional options are being rolled out. In addition to direct peer-to-peer private mortgage lending, many of these solutions are proving to be far superior and pack many benefits for all parties involved. This can include funds which offer financing for investors, pooling money and brokering private money through hard money lenders and mortgage brokers, crowdfunding, social finance platforms, and new alternative lenders offering commercial financing on residential properties. Those with capital benefit by retaining a larger percentage of higher returns, while borrowers can enjoy less hassle and enjoy borrowing with dignity and frequently on better terms.
There is a good chance that we’ll ultimately slide back to sub-prime type lending, with a few new twists and a different name in the next 5 to 7 years. The question is: will borrowers remember the lessons and be smart in how they use leverage?