Have you applied for a mortgage loan recently? As many who have will tell you -- good luck getting approved. They say banks are not only tight with the cash, they’re more stringent than ever in deciding who gets that cash. But is that really the case?
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I suspect Americans are still not over the easy-money lending days before the financial meltdown. Back then, all you needed to get a loan was pretty much a pulse, and even if you didn’t have enough income to qualify, no problem, because you didn’t need to prove the income you had. “No-doc” loans were all the rage, and subprime mortgages became a cottage industry.
Lending standards weren’t only loose, they were almost obscene. It wasn’t at all unusual for prospective buyers to put as little as 3% down to get a mortgage, if they had to put anything down at all! “Them were the days,” my friends! But them were also unusual days. They represented a dramatic departure from norm and normal lending standards.
Recently I wrote about how banks were emboldened by Congress and presidents in both parties to make the dream of owning a home a reality for many more Americans – even those who might not be able to afford one. As I discussed, banks were hardly without fault for gumming up this process, but who gave them that gum? Who pushed them into loosening lending standards that would allow more Americans to qualify for mortgages that in the past they never would have?
Washington goosed the system and pretty soon, it looked like the goose could only lay golden eggs. More folks not only got loans, but to the surprise of skeptical lenders, they consistently paid those loans – each month, every month. That’s because the wind at this whole booming business’s back was the ever-soaring value of real estate. It wasn’t only a nice investment, it was a hot investment – very hot.
Annual returns of 1%-to-3% that were the industry norm throughout much of the 1950s right through the mid-1980s, rocketed to 10% in the go-go 1990s through 2006. Homes flipped liked Internet stocks. The stories were legendary of condominium high-rises sprouting up in white-hot markets, such as Miami and Las Vegas. Buyers bid on properties sight un-seen, then flipped them for a tidy profit months later, before construction was even complete.
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Back during the boom, loans weren’t only easy to get, the terms were also easy to take. Adjustable-rate mortgages were the rage because they allowed Americans who might not otherwise qualify, to get in at a ridiculously low rate for which they would qualify. No need to worry as that rate went up, because the underlying value of the home to which that mortgage was pegged went up too.
House of Cards
Until it didn’t. Until rates crept up, but home values did not. And subprime borrowers who’d been making their payments, suddenly had difficulty making them. Until some of them stopped making their payments. Until more started falling behind on their payments. Until some nervous lenders started calling back their loans, but not before hurriedly rushing out their re-packaged junk of mortgages on supposedly un-suspecting buyers.
Then it all ended. The boom. The easy mortgages. Pretty soon, all mortgages. Homebuyers were hurting. Homebuilders were retreating. And those home lenders? They started disappearing. The loose lending that supposedly had defined a new era, was found in serious error. Things had gotten out of hand. Banks pushed it. Washington endorsed it, and anyone who was anyone in power cheered it. Until it stopped working, and the fingers started pointing, and the stock market started crashing.
And ever since banks have been licking their financial wounds. In the immediate aftermath of the meltdown, banks not only tightened their borrowing standards, some just closed the lending spigot entirely. It was a fair criticism at the time, but totally justified at the time. They weren’t only leery to lend, they were panicked they’d get stuck with the bill and be brought to the brink again if they even tried.
On paper, it made sense for them to at least “try” and lend to the right folks – after all, money was cheap, and interest rates were ridiculously low, so lending that money back out to the right borrower guaranteed a solid profit, even with mortgage rates in the 4% and 5% range.
Oddly enough, that’s roughly where mortgage rates are today, yet something has changed. Banks are lending. They’re just not doing so recklessly or foolishly. Gone are the days you could put no money down or very little money down. Today it’s quite common for lenders to demand buyers pony up 10% or more of the purchase price.
On second homes or investment properties, the down payment must be closer to 20% or even 30% or 35%. Startling to some, but back to business as usual, to me.
The argument now isn’t that different than it was when our parents were buying homes – you have to have skin in the game. You have to put up to make sure you just don’t walk off.
What’s wrong with that? What’s wrong with going back to some basic standards? What’s wrong with saving for a home versus feeling entitled to a home? What’s wrong with returning to basic math, and maybe simple sanity?
I hear many young people today complain about interest rates inching up, fearing that the mortgage they could have had at 4.75% now is closer to 5%, and that’s when I feel ridiculously old. When my wife and I purchased our first home back in the mid-1980s, our mortgage carried a 13.5% interest rate, and we thought we nabbed a bargain, since comparable mortgages at the time were going for north of 14%!
That was then, it seems unfathomable now. But that’s the way it was, as was the lender’s stringent requirement that our credit score be sound, and our earnings potential be promising.
If you think about it, banks are simply returning to those days, and to those not-so-outrageous qualifications. The good news is they are doing so in a very low-interest-rate environment, even lower than the nirvana days of the 1950s, when our parents put down 20% and had to make sure they had the income and resources to continue making the payments.
My friends, banks aren’t being tight-fisted, they’re just returning to form -- and I like to think a fiscally-prudent form at that. Their demands may seem out of the recent norm, but they are very much the historical norm. You have to have a good credit score, a good employment history, and likely a good amount of dough to put down to show you’ve got serious intent. What’s more, you have to prove that intent. You have to prove promise. You have to prove you’re not flipping through the process, you’re understanding the process and the responsibility that comes with owning a home.
These might seem like outrageous demands to some today. We’re just going back to the simple demands pre go-go days! For previous generations they were the way things were done -- so what’s so dangerous about returning to those basic standards now?
So the next time someone tells you about how impossible it is to get a mortgage today, you might remind them that it sure beats the alternative…when everyone was getting mortgages and the whole country paid for drunken stupor it later caused.
But that was then. Contrary to what you’re hearing in the mainstream media, it’s back to reality now. Don’t bash it. Be grateful for it. Things could be worse. Come to think of it…they were.