Part of the reason I haven’t written an entry on this blog in some time is the glut of sensational articles in the media. With headlines that scream CRISIS, MELTDOWN, and FORECLOSURE it is hard to get to the meat of the issue. Many potential buyers think that they can not get financing. This is not true for most borrowers.
First a little flowchart of how money is lent out. The mortgage broker or bank approves a loan for a home buyer. Rather than keep the loan and wait for the monthly payments, that loan is likely sold by the bank in order to get more funds to loan out. The way these loans are sold is by bundling many loans together and selling them as mortgage-backed securities on the bond market. Investors buy the securities and get a rate of return based on the types of loans in the security. The bank gets the needed cash to lend; the investors get a regular return.
The mortgage market’s problems stem from the past few years of easy lending requirements. The investors were all too eager to buy the mortgage-backed securities, not accounting that there was some risk attached to them. As the investors were buying without analyzing risk, some lenders (particularly sub-prime) stopped looking over borrower’s documentation. Borrowers were getting approved for more money than they could afford. Some borrowers never should have qualified at all. The lenders are to blame for not qualifying the borrowers; the borrowers are to blame for not realistically judging their ability to pay, and the investors are to blame for not balancing the return on investment vs. the risk.
Some loans started going bad --> Investors stopped buying the mortgage-backed securities --> Funds for new loans dried up --> Many lenders have gone out of business.
The remaining lenders have tightened their guidelines, partially to reduce the risk of foreclosure, but mostly in hopes of getting investors to start buying the loans again. This does mean that some borrowers no longer qualify, but many still do. The high loan-to-value and “no documentation” loans are largely gone, but the borrower that earns a paycheck and has a decent credit score can still get financing. 100% financing is still available as well, and mortgage insurance (if needed) is deductible just like interest on your loan. Rates are still at historical lows. This is actually a great time to be a buyer with low interest rates, a large supply of homes for sale, and employment still strong in the area.
Some sanity has returned to the lending industry. Lenders are back to qualifying borrowers based on their documentation. The highest risk borrowers will not qualify. It may be a while before the panic of the investors subsides, but for many borrowers not much has changed.
