Easing Bank Credit Standards And Lending Terms? It’s About Time!

Hands RaisedIn a recent Wall Street Journal article entitled “Mortgage Lenders Ease Rules for Home Buyers in Hunt for Business” by Nick Timiraos and Annamaria Andriotis, we continue to hear that banks are beating the bushes for borrowers; and they are relaxing some of the tough lending requirements that have stymied may would-be homebuyers over the past few years.  The reason? The refi boom which was triggered by ever lower interest rates has about run its course.  In the search for other profit centers, many banks are trying to fill the void with loan origination business. 

This story provides a series of anecdotes of bank making loans, and average folks getting loans, that would not have occurred over the past few years. For anyone considering a home loan today, this article is a breath of fresh air in what has been a pretty dismal lending landscape following the financial and housing collapse.  Here are some snippets from the article:

Over the past year, however, more than one in six loans made outside of the FHA included down payments of less than 10%, the highest share since 2008, according to figures from data firm Black Knight Financial Services. That still is lower than the nearly 44% of the market they accounted for at the peak of the housing bubble in early 2007.

Fannie Mae and Freddie Mac, the government-supported housing giants, will buy loans with down payments as low as 5% if they carry mortgage insurance. The uptick reflects insurers’ increasing confidence in the housing market and the fact that the FHA is charging higher fees, which makes private insurance more attractive for borrowers with strong credit, said Rob Schaefer, a credit executive at Fannie Mae.

Wells FargoWFC -0.33% & Co., the nation’s largest mortgage originator, this year began allowing certain borrowers who make down payments of 5% on a primary residence to have up to 2% of the down payment come as a gift from relatives. Borrowers must have strong credit and purchase mortgage insurance.

Conclusion.  To those naysayers and hand-wringers fearing another “bubble,” I say ‘nonsense.’  The conditions that caused the Great Recession of 2008/9 don’t exist today – even though some Big Bank execs may wish they did.[1]  So the good news is that banks are having to go back to their roots, making money the old fashioned way – earning it. And that’s not a bad thing. ~PCQ 

[1] Setting aside the issue of Big Bank greed – which is imprinted in the DNA of their top execs and traders –  there were certain business models in existence back then which will not likely be resurrected anytime soon – at least not without heightened regulatory oversight.  The private label secondary mortgage market does not exist today.  It may come back in one form or another with GSE reform [depending on whether the White House and Congress are red or blue], but will be much more highly regulatedProprietary trading at Big Banks is becoming more limited thanks to the Volcker Rule.  [Note: Prop trading did not cause the financial crisis. But when all of the regulators set about poking and prodding the Big Banks with the enthusiasm of a proctologist on steroids, prop trading became collateral damage from the “Too Big to Fail” mindset.]  And residential lending itself will not again contain the type of “easy money” terms such as interest-only or negative amortization provisions, thanks to the QM and ATR rules of Dodd-Frank. This means that, contrary to 2006-8, loans will likely not be made to folks who should not have them.  In short, all of the ills that combined to cause the Great Recession will not likely occur in the foreseeable future.  This isn’t to say the Big Banks won’t find a “work-around” approach to making money without really having to “earn” it.