Have you ever noticed how the pendulum swings back and forth but never goes from the extremes to the center without lots of repetition? So much of life is like a pendulum including real estate and the mortgage market. For every action on one side of the cycle there is a reaction to the other extreme.
Today the mortgage market has swung toward conservative. In fact, lending practices have become so stringent that acquiring a mortgage has become very difficult. Just a few short years ago lenders were so liberal in their application approvals that one only had to be alive (although there's rumor that some deceased borrowers were even approved for a loan!) to get a mortgage. Aaron Dickinson has an interesting article on how loose lending got us to this sorry state, and now tight lending is keeping us there!
The irony about the swing from easy lending to difficult lending is that neither is good for the market. The easy lending practices allowed buyers who really couldn't afford a home to get a mortgage. (A true breeding ground for default.) The lenders who cast a closed eye at applications that were obviously not realistic, or who encouraged borrowers to get a mortgage with teaser rates that would inflate more quickly than the buyer's income seemed as surprised by the turn in the market as others were. Big companies were caught with their hands in the cookie jar, ever reaching for bigger profits. The fall of Bear Stearns, the demise of Indy Mac (a notorious subprime lender), tightening of home equity lines of credit, and the rise in foreclosures took the lenders all by surprise? I think not.
Even I had wondered when it would end and I'm not an economist. Surely the people in the know knew that easy money with no downpayment gives little incentive to stay the course when times get tough. Why would an upside down borrower remain faithful to his lender when so many don't remain faithful to even their spouses whom they know and care about? The money was too easy to get. The consequences of defaulting were too easy to bear.
So now the pendulum has swung from almost everyone getting a loan to the other extreme. The real estate pendulum has begun to center itself and balance will eventually return . . . if we live long enough! ☺
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