Just six years ago the housing market was doing great. Things were moving along, prices were increasing, and people were getting loans. Shortly thereafter things fell apart. There were a lot of loans issued that simply were inappropriate. Loans that were good for the lender, they could collect a commission and sell the loan off to someone else. Because of the collapse, banks and other lending institutions tightened up and stopped giving credit to anyone who did not meet some very strict criteria. For the past few years only those with great credit, sound incomes, and low debt to income ratios were able to finance a house. But lately, signs have shown that lending requirements are loosening.
One of the major causes of the housing market crash was due to subprime mortgages. A subprime mortgage is not just one that is given to someone with poor credit. Many of these borrowers had a poor or spotty work history, no debt experience, little to no down payments, less than adequate savings, incomes that barely (if at all) met the requirements, or they had many other debts that were taking up their income. It is the American Dream to own a home, and people who actually could not afford to do so were getting loans. When they started defaulting on those loans, subprime lending all but ended. Lately it has been seen that lenders are starting to lend to that market again. It is not as lenient as it was, but if someone has bad credit, but has good work history, adequate income, little to no other debt, and is able to make a good down payment, then lenders see them as an acceptable risk.
Not too long ago there was a requirement put on all new loans and refinances that any income must be documented and verified. During my own refinance in October, I had to go through my bank statement and give an account for all the deposits that did not come from my job (for instance: if a group went for dinner and I put everything on my credit card and collected cash from everyone that was later deposited to my bank account, I had to write a justification of where that money came from). This was because the lender knew they had to justify all incomes, but they did not have any requirements saying what amounts needed justified or not. Now Fannie Mae only requires proof of source for incomes that represent 25% or more than your regular paycheck deposits. This gives lenders a baseline on what to look for and helps them to be more confident when giving out loans.
By nature jumbo loans (those that are more than $417,000) are risky. When the housing market tumbled, luxury homes took the biggest hit. They lost a lot of their value, and since people were not making as much money, never mind being unable to acquire a loan, they sat idle on the market for quite a while. But now as property values are going back up, lenders are looking to originate more jumbo loans.
Recently FICO and the Professional Risk Managers’ International Association (PRMIA) conducted their survey of bank professionals. They found that over 2/3 of bank professionals believe that mortgage delinquencies will decrease this year. In addition to that, over half of those surveyed feel the housing market will be stronger by the end of the year.
The housing crisis showed many areas of weakness in the mortgage lending market. Now as things are getting straightened out, and regulators and lawmakers are getting rules in place to prevent another disaster, lending is loosening. This means that more people have access to money to buy homes. As more people buy homes, the market will continue to improve. As long as lending does not go wild like it did in the past, the economy ought to keep doing well.