Home Loans More Risky Than Ever

Home loans easier to get despite pressure from Federal regulators

The crazy ride of the US housing market continues as home prices just keep going up. The median price of a new home in the US, which reached an unthinkable $200,000 not that long ago, is now approaching $220,000. The increase in prices is running way ahead of salaries, which many think would make homes unaffordable. The lending industry, not to be swayed by a lack of money on the part of would-be buyers, keeps coming up with new and clever ways to help people obtain home loans. Last May, Federal banking regulators warned lenders that they are making it too easy to borrow money, and that they are lending money to too many people who may not be able to repay it.

The response of the mortgage industry was to loosen lending restrictions. It is now easier to obtain a home loan than ever. Major banks have lowered the credit score necessary to qualify for home loans, increased the percentage of income that may be spent on a home loan, introduced loans that don’t require proof of income and introduced more risky loans such as the dangerous Option ARM. Why is the industry making it easier to borrow money when the Government has suggested that they make it more difficult?

The answer, as always, is competition and profits. The market is hot, buyers want the property, and bankers have money to lend. The so-so behavior of the stock market in recent years has made real estate THE thing in which to invest. Lenders know this, and they also know that if a borrower cannot borrow from them, he or she will borrow from the bank down the street. So, for every mortgage broker, the question becomes, “What can I do to get this person a loan?” By lowering the standards that define a loan qualification, lenders sell more product.

There are problems with this, of course. There will always be some buyers who will default on their mortgages. Now there will be more, as some borrowers who are on the fringe of qualifying will now be eligible. This situation will be made worse should interest rates increase. As interest rates are near all time lows, an increase seems inevitable. The effects of these changes can be felt by anyone; not just those with questionable credit. Lenders are often too quick to suggest a loan that exceeds an amount that the buyer will feel comfortable paying. One should not assume that it’s OK to pay $2500 per month on a house note just because the broker says it’s OK. Every buyer needs to know their own lifestyle, budget and means, and live within that. If you know that, given your salary, $1500 is all you’ll feel comfortable paying each month, then you should keep that in mind when applying for a mortgage.

In the end, the risk falls on the buyers, not the lenders. It is the buyers who must pay the note and the buyers who will risk foreclosure. Those shopping for a new home should determine what they can comfortably pay, stick with that figure, and try not to be swayed by the broker who just wants another commission.