Tuesday, April 11, 2006

Lax Lending Standards Feed Critical Mass

From Realty Times:

Easy Mortgage Money Gets Even Easier

As interest rates rise, as homes get more expensive and as more and more buyers seek high-leverage, higher-risk mortgages, instead of tightening credit, lenders are taking steps to keep the easy money easy.

Federal regulators now fear that lenders are attempting to maintain profit levels by easing lending standards at a time when they should be tightening them.
The practices threaten borrowers with the potential for defaults on loans they couldn't really afford and, if too many borrowers default, lenders could also face collapse, according to
John M. Reich, director of the Office of Thrift Supervision, speaking recently before the New York Bankers Association.
"I am concerned that there has been an overall slippage in underwriting due to increased competition in certain markets segments and areas. Specifically, my examiners have noted examples where loan pricing misaligns with credit risk solely due to competition and the desire for loan volume. We are also seeing an increased liberalization of terms by some institutions in order to maintain their loan volume. This is particularly troubling as institutions are effectively taking on greater risks with less vigilance regarding their overall program requirements," Reich said.
To that end Reich said regulatory examiners are now "digging deeper" into loan portfolios to learn the level of risk lenders are facing. Examiners will scrutinize loan documentation, pricing, loan-to-value ratios, and overall underwriting standards.

Caveat Emptor,


Blogger grim said...

Lowering lending standards at this point in the cycle only serves to inject greater risk into the market.


4/11/2006 08:48:00 AM  
Anonymous Anonymous said...

More corrupt unethical lending will make the Housing Bust much worse.

As it is unwinding now expect a cascading impact soon as reality sinks in and denial fades.

4/11/2006 08:55:00 AM  
Blogger Richie said...

This is the same thing the auto industry did to keep the sales volume up. Rather then to make a larger profit, they upped all their incentives, threw in 0% financing, etc, just to keep the numbers high. That looks good for a year or 2, then after that it's all downhill.


4/11/2006 08:57:00 AM  
Blogger grim said...

I agree.. Trying to push loans to poor quality borrowers in an attempt to keep volumes at these unrealistically high levels is going to significantly increase the possibility of a 'hard landing'. Lowering standards further means that these are quite possibly the lowest quality borrowers to date. These borrowers will also be paying near peak prices.

Tightening credit standards at the top of a cycle will decrease demand and prices as well, there isn't any doubt about that. However, this scenario doesn't inject further risk into the market..


4/11/2006 09:02:00 AM  
Anonymous Anonymous said...

I know somebody who has not had a steady job for 4 years and is currently out of work (her salary is less than $30k when she is working). She closes on her second house next month! So now she will have a mortgage on the first house (until she sells it), a home equity loan, and a new mortgage on the second home.Go figure.

4/11/2006 09:10:00 AM  
Anonymous Anonymous said...

I have a friend in Austin Texas who is a fire fighter. He works three 12 hours shifts and on his days off he works as a real estate agent selling homes. Just another clue as to how bad this is going to turn out.

When taxi cab drivers and Shop Rite cashiers start handing out advise it's time to head for the exit.

4/11/2006 09:29:00 AM  
Anonymous Anonymous said...

ironically enough - some of the best advice I've received in life were from NYC cab drivers

4/11/2006 10:08:00 AM  
Anonymous Anonymous said...

Homeless people are now defaulting on Fannie-backed loans. Get ready for the taxpayer bailout...

4/11/2006 11:19:00 AM  
Anonymous Anonymous said...

Read an article where a man with absolutely nothing to his name was able to buy 4 houses.


No different in other bubble periods when easy credit and fraudulent behavior was widespread.

This is NO different. Housing is deadmeat.

4/11/2006 12:56:00 PM  
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4/19/2006 12:30:00 AM  
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