2007 April 02 | Wheatworks Blog: Financial Matters

Archive for 2nd April 2007

Sub-Prime Woes Will Be Replaced By Solid Lending Practices

4/2/2007, 3:10 pm

We’ve all heard of the problems with sub-prime lending and the economic concerns these problems have generated across the country. A couple dozen sub-prime lenders have hit the skids and are going/have gone bankrupt. Some reporters and prognosticators are calling this initial sub-prime lending problem the “tip of the iceberg”.

These sub-prime lending issues will have an impact on mortgage lending. Fortunately, one change that will occur is that lenders will begin paying closer attention to borrowers’ ability to make their mortgage payments without going under. Foreclosures hurt all the parties involved.

Somewhere along the way, significantly sized groups of lenders and borrowers lost touch with basic financial realities. Home buyers cannot borrow more than they can repay and expect good to come of it. Nor can lenders provide more than a borrower can repay and expect a good result.

During the last few years many lenders have set aside the time-tested qualifying ratios to meet the appetites of home buyers whose eyes were bigger than their stomachs. No doc loans, adjustable rate mortgages and negatively amortizing loans were passed out by brokers and lenders who immediately passed these hot potato loans on to those holding mortgage backed securities.

This freedom to loan money without consequence for defaults is one of the reasons so many bad loans were made in the last few years.

I am much more likely to pay attention to whether you can repay me if you are actually borrowing my money than I would be if I’m merely the middleman collecting a “finder’s fee” or yield spread premium (YSP) for getting you to sign some papers.

Perhaps you remember when the standard housing ratio was 28 and the debt ratio was 36. And you may remember when buying a home required a home buyer to make a significant down payment. Many will remember when credit reports were pulled and reviewed with a fine-toothed comb by lenders.

Meeting the qualifying ratios, making a healthy down payment and having a good credit report will soon be back in financial fashion for home buyers. And this will be a very good thing.

During recent years, several people have asked why Real Estate Calculator Suite does not have an ARM calculator. It hasn’t needed it. During these strange times when many have used ARMs and NegARMs to buy houses, interest rates for fixed rate mortgages have been at historic lows!

Since 1997, using Real Estate Calculator Suite has been a good way calculate financial scenarios for home buyers using safe, fixed rate mortgages. The software’s default settings have always included the long-standard use of housing and debt ratios, qualifying based on income, and the expectation of a down payment.

Buying a home has always been serious business because it has financial consequences lasting long into your future. It’s good to know that standard financial values and risk-averse lending practices are coming into their own again.

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