banner2 Lenders Urged to Be Careful

 

 


Federal Regulators Urge Banks to Be Careful Issuing Home Loans

Home lenders told that markets may be peaking

The banking industry has been warned by federal banking regulators to be careful when issuing mortgages and home equity loans. Real estate prices have reached record levels during the last two years, and there are indications that the market may be reaching its peak. Purchasing a home is easier than ever; banks, credit unions and other financial institutions now offer dozens of different mortgage options. Most anyone can find something that will work for his or her particular financial situation. Some of these loans, while friendly to buyers, represent a serious risk to the lender. One such loan, the interest-only loan,

allows the buyer to pay only the interest on the loan for a few years. This keeps payments low, but a drop in home values could leave a homeowner with a mortgage that is worth more than their home, which could lead to default.

The last five years have seen a huge increase in home lending options, and this has led to aggressive marketing by banks, as they invest their money in mortgages, rather than high-risk tech stocks. The billions of dollars that were being invested in Internet companies a few years ago are now going into real estate, as investors feel that property represents a safer investment. With this infusion of cash, lenders are all too happy to help the tens of thousands of customers who come into their offices each day, offering a huge variety of loans that increases in scope every day. A large variety of loans is great for both lenders and buyers, as nearly anyone can qualify for a mortgage. The problem comes with risky types of loans, such as the interest-only loan and home equity loans that exceed 100% of the value of the property.

Such loans are issued with the assumption that home values will continue to increase indefinitely. Prices may well continue to increase in the long run, but there are occasional drops in the market that could harm lenders greatly. A downturn in prices, even a short one, could leave lenders holding billions of dollars worth of loans that exceed the value of the properties they represent. Defaults on such loans could drive many lenders out of business.

As of now, there is no nationwide trend towards a housing bust, but in two states, Texas and Florida, the foreclosure rate has been rising this year. This may be an aberration, or it may be an indicator of trouble ahead in the general housing market. The Federal banking regulators have not told lenders specifically how they should behave in the current precarious market, but they did suggest that banks check documentation for prospective mortgages more carefully, particularly with so-called “no-doc” loans, which require minimal documentation from qualified borrowers.

The average borrower has little to worry about, as the suggestions from the government would seem to make sense to most anyone. Unfortunately, in boom times, common sense often goes out the window, only to return when thousands of buyers stop making their payments. Once that happens, it’s too late to do anything, and the stockholders of the banks are the ones left holding the worthless house notes.
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