On May 1st, Wells Fargo, one of the nation's largest mortgage lenders, decided to tighten its underwriting standards for 200 markets they considered as distressed or soft, requiring higher down payments and making state-income loans off limits in most of these markets. I believe this will cause other banks to follow suit (the bandwagon effect).
This is one more action that shows that the stimulus money provided by the Federal Government and intended to loosen up credit and provide funding to stabilize the real estate market is not working as intended. The government should have required the banks to lend this money out, instead of playing conservative and padding their balance sheets with it.
Regardless of what the government does, banks need to provide access to money to get the economy going. While tightening underwriting rules is a good long-term, safe strategy (which they should have done ten years ago - look at Canada!) their timing stinks and their strategy is not aligned with the consensus view that a real estate market recovery is the key to a swift economic recovery.
Fortunately, FHA-backed loans are providing some relief for lower-priced properties by guaranteeing mortgage loans of up to 97.5% of the purchase price. FHA loans went from "pariahs" to "superstars" in the last three years. Today, a big chunk of all the loans (that are actually closing) are FHA. Once again, it is the government who is taking the risk...
I hope that lenders understand that they also have a responsibility to loosen up their requirements in times of distress. I believe it is a measure of their corporate social responsibility commitment - the communities they operate in are also stakeholders, not only their shareholders. After all, it was their irresponsible behavior during the good times that got us in this mess.
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