When I can, I like to respond to the Realtor.com “Hot Topic” which they typically refresh every week or so.  This week’s is “Will credit flow more easily again?”  My answer, in two words: Yes, but . . . 

Yes

Last September, when the global credit markets went to hell in a hand basket, everyone realized (overnight, it seems) that mortgage lenders had grossly underestimated the risk associated with their mortgages (in other words, rates of borrower default, it turned out, were far higher than lenders and investors had predicted).

As a result, lenders of all kinds clamped down on lending.  They had no idea what kind of catastrophe the next month, week, or even day would hold.  They held tight to their money, not knowing if they would need the cash to shore up balances hit hard by defaults on their existing loans.  Suddenly, even borrowers with credit scores of 700 and documentable incomes high enough to easily afford their mortgage payments were being turned down for loans, or charged much higher interest rates. 

But that was a knee-jerk reaction that has since proved to be overkill.  Credit has loosened since the end of last year, and will continue to, as real estate markets stabilize and we all begin to see the economy turning upward.  When lenders once again feel confident in the stability of their current loan portfolios and the health of the economy in general, they will look to credit-worthy consumers to lend their money to.

Why will they do that?  Because lenders make money by lending.  They clearly got overzealous during the real estate boom, thinking they could make ever-more money by lending ever-more money to anyone with a pulse.  Now they realize that was a flawed tactic.  But it hasn’t changed the fact that mortgage lenders (as well as credit card companies, banks, investment companies, and others who are in the business of lending money) make money off of the interest they charge their borrowers. 

But. . .

Credit will never (we should hope) flow as easily as it did during the real estate boom.  I hate to say it, but there are some people who are simply not financially ready to be homeowners.  Perhaps their incomes aren’t high enough.  Or they haven’t established a history of repaying debt on time.  Three years ago, those types of borrowers (really, anyone with a pulse) could get a mortgage loan.  Today, banks realistically require enough income to pay the loan as well as other expenses (like, food) and a reasonable history of repaying credit on time.

(To learn about improving your credit score so that you can prove to lenders you’re a good credit risk, check out my post, 4 Steps to Better Credit.)

In other words, credit issuers (mortgage lenders, credit card companies, banks) have realized that they underestimated risk for a long time.  With more realistic beliefs about borrowers' risk, they will necessarily issue less credit (or, at least, will issue credit to fewer borrowers) than they did during the boom.  At the same time, as they "chill out" from the credit freeze and Depression scare, they will issue more credit than they have over the last year.

What do you think?  Will credit flow more easily again?  Click on the “Comments” link below and join the discussion!