As regulators and jittery investors force them to adopt more and more conservative lending standards, lenders are cutting more people out of the housing market. In what would strike most people outside the industry as a return to common sense, lenders now are shunning would-be borrowers who can't make a down payment, prove that they have a reliable income and show a record of reasonably regular bill-paying. They also are turning down refinancing requests from many people trapped by adjustable-rate loans that are proving too expensive after the initial feel-good period of low payments.
"This week is going to be a nightmare," says Melissa Cohn, chief executive of Manhattan Mortgage in New York. Lenders are scaling back so fast that it isn't clear which loans are available or on what terms, and rates are jumping even on large loans, known as jumbos, for prime borrowers.
Here's a short course on why this is bad.
Thanks to Calculated Risk we have a graph of new and existing homes available for sale:
Basically we have a glut of homes on the market and have had a glut of homes on the market for some time.
Starting is say mid-2004 lenders started to get really aggressive in lending to people with bad credit. The basic issue here is lenders had pretty much exhausted the pool of solid credit risk, but lenders still wanted to make money. Hence, the easy liquidity.
Now lenders are returning to "prudent lending standards", basically meaning they are returning to the traditional way to doing business. That means concepts like a track record of paying bills is now important again.
So let's add all of these factors together.
-- Inventory of new and existing homes is incredibly high
-- Lenders are tightening Credit standards
-- The pool of good mortgage risk is small
That means the housing market is going to be facing a terrible remainder of the year.