Anyone interested in buying a house in Santa Barbara today has heard that they should expect to find tougher mortgage lending requirements. Sometimes that can seem arbitrary -- or just plain unfair. But unfair or not, the new lending reality is probably here to stay for a while, and the causes are understandable.
The mortgage industry learned a powerful lesson from the past, when it pretty much gave anyone who applied a generous loan – sometimes with practically no questions asked. But this “generosity” created financial problems for both the banking industry and the country as a whole. It's not hard to understand why lending guidelines are stricter.
Reducing Loan Defaults
The overriding reason for tougher lending policies is to reduce the number of loan defaults. In order to qualify for a mortgage, borrowers are finding that lenders now look more closely, may require a higher annual income, better credit score, or a larger down payment. Their high-priority goal is preventing any foreclosure situation where the bank owns a property it has to sell or rent itself.
Questioning Future Value
For many years, homebuyers never questioned the investment value that seemed to automatically accompany any piece of real estate. Buying a house was like investing in a blue chip stock: certain to rise. The advent of a shrinking Dow Jones Average preceded the phenomenon of ‘upside down’ homeowner equity. But in both cases, long gone is the idea that everyone should expect to find no-brainer investment opportunities. When buying a house can mean exposing the lender to a future where more is owed than a house is worth, they naturally seek a safer place for their money. Since a smaller loan or larger down payment achieves that goal, that’s what lenders tend to offer.
Lowering Consumer Debt
During 2010, the nation’s ten largest mortgage lenders turned down about 26% of all applications (according to the Wall Street Journal). In many cases, that could be attributed to lowered credit scores – due in turn to increased debts from credit cards or unpaid student loans. In fact, those heavy debt loads are part of what got homeowners into financial trouble and helped to fuel the housing market crisis.
In the short term, homebuyers denied a loan can’t help but be keenly disappointed. But it can ultimately provide time to let them raise their credit scores, increase their savings, and get their financial affairs onto firm ground. The ultimate effect should be to put the whole housing market there, too.