Are you impressed with my attempt at a catching title?
I am sure everyone involved in Real Estate has personally experienced some sort of tightening of the market, I thought I would give everyone an update on what I am seeing on the lending side.
Back in the prime of the market, lenders were open to just about every situation. If you had a FICO score over 620, you could get approved up to $750,000 with just 3 letters of reference from people that you have done business with. You wouldn't even need any reserves showing that you could put money aside. Wow have things changed. That same lender that offered that program, has tightened up to the point that they don't do this type of loan whatsoever. Stated Income loan with 100% financing has dwindled tremendously. Some lenders are still offering it, but the number of them has tanked. The reason for these cut backs is that the lenders that were offering these programs, have continually loss money on these loans. The number of first payment defaults in this type of loan has gone through the roof.
It makes sense to stop offerering these loans. Lenders generate about $1000 total in revenue to close this type of loan, and have banked on the fact that they would get interest in the amount of $1000's per month to hedge against the lack of upfront revenue. People that have qualified and gotten these mortgages, have two options, pay 1000's per month in interest to have a home of their own, or simply not pay for the mortgage. In essense, these people could live expense free for up to 150 days, until the foreclosure sale is done. I know all of us would worry about the consequences of having a foreclosure on your credit report, but we aren't all concerned. Live expense free, great!
Lenders are getting killed in these situations. You may wonder how, or why. Well, they not only never get a payment, but they lose on these other levels as well:
Prepayment Penalty- These lenders make their money by the borrowers prepaying their loan through refinance or sale, if that doesn't exist, they lose big!
Time and overhead- Do you know how much overhead gets paid out to finance the purchase of a home, that the lender takes on. A lot! They have to pay the underwriter, the Account Exec, the managers, and funders, and many others, all paid per loan to close the loan, and move forward. On a loan to loan basis it gets up there.
Foreclosure Sale- They have to pay to sell the property. We all know that isn't cheap.
Unstable or depreciating market- Are we seeing homes sell in days or months right now? Months for sure. Not to say that houses aren't moving, but they we all can agree that they may sit for a while. Even then, they aren't selling for astronomical numbers that we have seen. In a 150 day time period, you would be lucky to see appreciation, and more likely to see depreciation in certain markets.
So how do lenders hedge against these risks? There are a few ways. They raise rates to much higher levels. They require more documentation of assets. They raise credit scores to higher requirements. What is being seen more than all of these is they just stopping offering 100% financing, if you can't prove your income, all together. This seems to be a common trend.
I think it all makes sense. If you don't have the assets, or don't have a sufficient credit score, you shouldn't be buying a home. PERIOD! If you can't qualify now, you should be required to prove that you have the discipline and know-how to get to that point. If that effort isn't there, the effort won't be there when paying the bill.