Realty Check

Mortgage Loans: Why Isn't Credit Even Tighter?

I was looking for some information this morning on just how much more it will cost you to get a loan today than it did just a year ago today, and I came upon a survey from the Federal Reserve that is really indicative of just how much the playing field has changed. For several decades the Fed has been doing a Loan Officer Survey, asking a slew of senior bank guys if they’re tightening their standards on residential mortgages.

As you might expect, the numbers were in the negative 2004-2006. As 'Crazy Eddie' used to say, "they were practically giving it all away." But in the most recent quarter of this year, Q2, things suddenly changed.

The Fed is now breaking down the questions to “Prime,” “Non-Traditional” and “Subprime.” The numbers, as you might expect, are high. 15% of loan officers say they are tightening credit to prime borrowers, 45% on non-traditional loans, and 56% say they are tightening credit to Subprimers. My questions is, on subprime and non-traditional, why isn’t it 100%??

Lending standards are now the toughest since the early nineties, but not that much tougher than at the turn of this century. Given everything we’ve seen in the market over the last few months, given the rising number of foreclosures, given several gloom and doom scenarios from homebuilders, to mortgage lenders to industry analysts--it would seem to me that we’d see a higher number of lenders tighten to the subprimers and the non-traditionals.

I guess the trouble is that despite the trouble, mortgage lenders that haven’t gone out of business, are in greater competition than ever before. With far fewer houses selling, and far fewer loans available to far fewer borrowers, they still have to be out there selling something. I’m still hearing from borrowers with good credit, that when they put in an application with one broker, they’re suddenly getting dozens of calls from others (this is a concept called “trigger leads,” a story I’m currently working on for later this week, so watch for it!).

The mortgage business hasn’t gone out of business: it’s just correcting along with the housing market, and that’s making for some strange scenarios. Lenders want to stay in business, but they have to change the way they do business, which means losing business.

FYI: A fellow blogger--Dr. Housing Bubble--writes in with a moment-to-moment Main St. look at foreclosure. Here it is: The Foreclosure Story: What does the Process Look Lilke?

Questions?  Comments?