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Do Tighter Lending Standards Slow the Recovery?

HI5-12-13After the housing crash of a few years ago exposed the shifty underbelly of lending practices at the nation’s major banks, those institutions have been – albeit reluctantly – cleaning up their act with greater accountability and tighter lending standards aimed at forestalling another collapse caused by overlending to “subprime” borrowers. But a new article in the Wall Street Journal reports that these new, cautious policies may be putting a damper on the housing recovery.

One of the main reasons for the noisy popping of the “housing bubble” back in 2007-2008 was the loosening of lending standards that allowed so many mortgages to be granted to subprime borrowers – those with relatively poor credit and potential problems with repayment/ Many of these borrowers also ended up with adjustable rate mortgages whose terms they poorly understood, so that when payments eventually went up, they had to default.

A number of lawsuits, settlements and government interventions later, the nation’s major lenders have instituted programs to help troubled homeowners with refinancing and payment plans, and instituted tighter borrowing standards and better oversight of the lending process – strategies intended to encourage people to take advantage of the current low interest rates.

But as the Wall Street Journal reports, the Federal Reserve’s new survey of senior loan officers at major banks reveals that these lenders are easing up a little on some loan requirements – but only to those with the best credit scores and payment histories. But those with middle of the road and lower credit scores still face tight scrutiny and more problems qualifying for mortgages. That shuts some would-be homebuyers out of the market, unable to take advantage of the current low interest rates that might make it possible to buy a home at all. And. some financial experts fear, the loss of this pool of potential buyers could drag down the housing recovery.

But not all risky buyers get equal treatment. As we discussed here a few posts ago, many banks are showing a new willingness to work with the “strategic defaulters” – homeowners faced with foreclosure who simply walked away from the mortgage and accepted the resulting blot on their credit. If a borrower’s only credit stain comes from a mortgage default that’s traceable back to the housing crash, some lenders are offering a second chance.

Stricter lending standards and better accountability are helping major banks clean up their images and avoid the consequences of another housing meltdown, but the results for the long term housing recovery may be mixed. For heroic income property investors following Jason Hartman’s recommendations to keep a fixed rate mortgage, it’s worth keeping an eye on the changing policies of these major players in the mortgage business. (Top image:flickr/gorfor)

The Heroic Investing Team

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