From the Desk of Bob Caldwell

The Credit Pendulum To Move Faster?

My how time flies. The housing boom America experienced in the past is now almost a decade old. If anyone can remember that far back, the boom was made possible in part through an unregulated market for home loans which brought us such programs as "no money down -- we don't ask about your income -- low credit score -- you can't believe how low your payment will be" adjustable rate loans. Basically, if you could breathe then you could purchase a home. The subsequent housing crisis ended all semblance of this easy credit as the credit pendulum swung drastically the other way. For some time you needed not only to fog a mirror to purchase a home, you needed to walk on water. For a while the secondary market in which lenders were able to sell loans to unsuspecting investors totally disappeared and government alternatives such as FHA, Fannie Mae and Freddie Mac dominated the residential finance markets. For years readers have been asking, when will credit loosen again?

Our answer has been very standard. There were two conditions that must be in place for credit to ease. First, the real estate market must get stronger. After all, it is real estate that secures these loans and if the investment is not stable, lenders will be more reticent to lend. Secondly, rates must rise. You may be tempted to think that lenders were waiting for rates to rise so that they could make more money on each loan. However, these loans are typically originated to be sold on the secondary markets to alleviate market rate risk. Rates needed to rise so that lenders were not inundated with refinances. If lenders don't have time to process the applications they had in their pipeline, why would they loosen credit standards to bring more in? Well, if you read the article in the news section -- this is exactly what has been happening. In the long run credit standards have been easing very, very slowly. But now that the real estate market is stronger and rates have risen to slow refinances, the trend potentially can accelerate. Keep in mind we are not talking about returning to the standards of the boom times of yore, but we expect standards to get more reasonable if these trends continue.

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"From the Desk of Bob Caldwell" Blog, Copyright 2013 Bob Caldwell